Berkeley Group Holdings plc (BKG) Ordinary Shares NPV
HL comment (27 March 2020)
Due to the ongoing disruption caused by COVID-19, Berkeley now expects profits for the year ending 30 April 2020 to be in the region of £475m.
Berkeley still intends to pay a 99.32p per share dividend on 31 March, totalling £125m, and to return £140.1m to shareholders by 30 September through a combination of dividends and share buybacks.
The group will reconsider its enhanced shareholder returns program in its full year results.
Berkeley said it's "suspending future guidance until there is greater clarity of the impact of COVID-19 on business and the wider economy".
The shares were down 1.5% following the announcement.
Like other housebuilders, the COVID-19 pandemic has forced Berkeley to wind down its operations for the time being. This is obviously going to hit profits in the short term, but the full extent of the damage will depend on the length of the shutdown and the speed of the economic recovery.
Berkeley has tended to run a tight ship through the economic cycle - it's enjoying high margins now partly because of its deft management of the financial crisis. The balance sheet is currently packed with just over £1bn of cash, and the group has a further £750m in available credit. The group had planned to return the lion's share of this to investors over the next two years, but has suspended the enhanced returns policy for the time being, which we think is sensible.
Unlike its peers, Berkeley is going forward with its original dividend and share buyback plans. The group certainly has a lot of cash and this move does show confidence on the part of management, but only time will tell whether this turns out to be hubris. We think paying dividends is pretty bold at the moment, and the taxpayer is likely to take a dim view of it if Berkeley takes any government help, including wage support for furloughed workers.
In the long run, we think the UK housing market is reasonably attractive. Brits still love to own their own homes, all political parties see the need for more housebuilding and mortgages are relatively affordable. However, the sector is cyclical and highly exposed to economic shocks. Berkeley does offer something different because it operates at the pricier end of the market and has a large exposure to London. Many of its sites are technically challenging, and that's afforded it enviable margins in the past. Whether or not this proves to be an advantage will depend upon the nature of our economic recovery.
The coming months will be difficult for Berkeley, but it should have the balance sheet strength to see it through. Even the strongest will get worn down by a prolonged shutdown though.
For now, the shares change hands for 1.6 times book value, which is below the long term average. However, because the value of Berkeley's assets are tied to house prices, they risk getting written down if the economy fails to bounce back quickly.
Overall, Berkeley offers a differentiated business model, and performance to date has been robust. If the shutdown proves short lived, we think it's well positioned to bounce back. But "if" is doing a lot of work here - a prolonged shutdown or slow economic recovery will eventually whittle away Berkeley's capital.
Berkeley has closed all of its sales offices and show homes, and is winding construction sites down as supply chain issues have started to impact the business. However, this process will take some time as sites need to be made safe and secure. The group will endeavour to finish homes nearing completion.
Accounting for the payment of the £125m dividend on 31 March, Berkeley has over £1.0bn in cash. Including bank facilities, the group has £1.75bn in potential liquidity. Management have made it their priority to maintain the dividend and continue to target a 15% return on equity over the long term.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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