Berkeley Group raises guidance

If, like this correspondent, you live in London and spend an unusual amount of time browsing the websites of listed housebuilders, Google will decide you are on the hunt for a newbuild flat in the capital. Via banner ads, the algorithm then spits out a parade of swanky, if tastefully snapped developments.

Berkeley Group (BKG), one of the few housebuilders with its colours still nailed to the city’s mast, often features. Investors weighing its prospects would be well advised to scan these listing pages.

Factsheets in Arabic and Mandarin – as well as investment brochures complete with projected equity appreciation and cash-flow tables – give a clearer picture of the rarefied air Berkeley breathes than trumped-up claims of a “bespoke and holistic place-making strategy” committed to creating “economic, environmental and social value”.

Of course, long-term shareholders will have few illusions about this business model. Despite fair tailwinds, the perceived risk-reward balance has tipped toward the negative at several points in the past six years, as markets variously fretted about price sustainability, high-end demand, build inflation costs and the perennial difficulties of building major sites within Greater London.

The latest signs, however, are positive. Improving buyer sentiment has helped the group to keep cancellations within a tolerable level, and sales prices above business plan. Crucially, for Berkeley’s model of community/asset building, “both domestic and overseas customers [continue] to see the positive long-term fundamentals of the London market”.

Near-term momentum is likely to be strong. In the six months to October, Berkeley sold 1,828 homes at an average of £647,000 each. Comparisons with the same period in 2020 – when prices averaged £799,000 and overall completions were 40 per cent lower – need to factor in last year’s lockdowns and a sales mix. In the months ahead, new launches are likely to push up the order book and helps explain the 5 per cent rise in full-year profit guidance to around £544m.

Thereafter, earnings are forecast to rise further and culminate in pre-tax profits of £625m for the year to April 2025. That may be short of 2018’s high water mark, but it should still translate into a not-too-shabby 50 per cent post-tax return on equity over four years (itself higher than Savills’ projected return on a £790,000 one-bed flat in Berkeley’s King’s Road Park scheme over the same period).  

FactSet-compiled consensus forecasts are for earnings of 367.4p per share for the current financial year, and 371.9p in FY2023. Berkeley’s capacity to preserve margins and return capital is impressive, though a premium rating to the sector needs to be balanced against London-centric risks. Hold.

Last IC View: Hold, 4,585p, 23 Jun 2021