Berkeley – profit guidance maintained

Berkeley’s sales rates in the four months to the end of February have been in line with the prior six months. This level marks a decline of around a third year-on-year.

The order book, which sat at £2.0bn at the half-year mark, has “continued to moderate” over the second half.

The net cash position at year-end is set to be above the half-year level of £422mn.

Berkeley expects to deliver full-year pre-tax profits of around £550mn, in line with current market consensus. Medium-term profit guidance has been reiterated, with at least £1.5bn of pre-tax profits expected over the three financial years ending April 2026.

The previously announced interim dividend of 33.0p per share will be paid on 29 March. Through a combination of dividends and share buybacks, the group plans to return a further £227mn to shareholders by September 2024.

The shares were broadly flat following the announcement.

Our view

Berkeley looks to be sitting on solid ground, despite the current weakness in the housing market. Sales rates have held in line with the first half of the year, and profit guidance has been reiterated.

Berkeley’s London focus, and higher-end product with an average sale price of £624,000 at the last count, means it offers something different to the other large builders. Many of its sites are technically challenging, and that’s afforded it enviable margins in the past.

Domestic and international demand in the key London area is likely to remain more robust than in other parts of the country, and the housing supply shortage doesn’t look to be going away anytime soon. Cancellation rates have normalised and build cost inflation is now back at negligible levels, which is helping to support margins.

The order book remains a key strength of the group, despite moderating from the £2.0bn level we saw at the half-year mark. All sales in the current financial year are locked in, and the group has committed buyers for more than 70% of next year’s sales. This gives Berkeley great revenue visibility and means the three-year £1.5bn pre-tax profit guidance looks achievable in our eyes.

There are some challenges to be aware of though.

While mortgage rates have dipped from peak levels, they remain elevated and continue to cause a relative lack of urgency among buyers. Year-on-year private sales rates were down by around a third as a result. Until there’s more certainty about the direction of travel, potential buyers will continue to be hesitant to sign the dotted line.

Berkeley’s already taken action to improve its financial resilience, with supply being carefully matched with demand and spending on new plots of land has also been reined in. But the group’s best-in-class land bank means that shouldn’t have too much of an impact on growth prospects when the housing market picks back up.

This saw net cash increase to £422mn in the first half, comfortably ahead of its full-year target. That figure looks set to rise further by year-end, meaning there’s room to feed cash back to shareholders through dividends and share buybacks, with the group on track to deliver on its £283mn goal. But as ever, no shareholder returns are guaranteed.

With its higher-end focus, Berkeley offers something different to the broader sector. That’s resulted in a premium price-to-book valuation compared to peers, which is justified in our eyes. But keep in mind that near-term challenges remain and this is reflected in Berkeley continuing to trade below its long-term average.

Environmental, social and governance (ESG) risk

Most housebuilders are relatively low risk in terms of ESG. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.

According to Sustainalytics, Berkeley Group’s management of ESG risk is strong. The group has strong science-based greenhouse reduction targets and deadlines which are backed by policy commitment and ongoing measurement, monitoring and reporting. However, while the group considers recyclability of products when making purchases, it does not disclose the percentage of recycled materials used, or a target for recycled material use in the future.