Berkeley weighs returning surplus capital

The outlook for Berkeley’s (BKG) profit growth may be subdued over the next five years, but shareholders can take succour in the prospect of sector-leading capital returns. The London-focused housebuilder is on track to return £280m a year, or 225p a share, through to 2025. The next £140m will be paid by the end of March via a mix of dividends and share buybacks, of which just over £37m has already been made, with the dividend amount to be confirmed before the end of February.

Management is still undecided on whether to return £455m of surplus capital to shareholders or invest the funds in new land. Yet an impressive net cash balance of more than £900m meant the group continued to build land holdings by adding four new sites, covering 2,800 homes, during the six months to October. The total land bank offers a gross margin - the group's term for estimated future profits - of £6.65bn, up from £6.42bn at the end of April.

A faster-than-expected recovery in production limited the decline in sales to around a fifth, with second-half profits now expected to be broadly in line with the first six months. Management is targeting an annual return on capital employed of 15 per cent, or £500m in pre-tax profits, until 2025. 

Given the superiority of shareholder returns compared with peers in the face of the pandemic, the shares have unsurprisingly attracted a premium valuation of 1.9 times forecast book value, against a sector average multiple of 1.6. While the shares are a solid holding, the group’s returns credentials are adequately reflected in the valuation. Hold. 

Last IC view: Hold, 4,371p, 18 Jun 2020