Berkeley Group even more bullish about bumper profits

Berkeley Group Holdings (The) (LSE:BKG) is making some tough choices in a tough environment and the strategy is currently keeping the group in resilient shape.

Against the parlous backdrop which the sector is facing, ranging from rising interest rates to doubts over mortgage availability and affordability, the current sales climate is inevitably on the wane. Berkeley has added to this list, citing the planning and regulatory environment as another reason why it is not currently investing in new developments.

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Indeed, the increasingly toxic combination of persistent inflation and the propensity of consumers to buy given the tightening economic environment and a rising interest rate environment, have filtered through to lessening demand. In the six months ended 31 October, net reservations have fallen by a third, leaving the group to focus on its current and immediate order book and sites.

At that point, Berkeley begins to edge away from some of its rivals. Its focus on London and the South East continues to reap rewards, with an average selling price of £624,000 compared to £560,000 the previous period not only underpinning its financial position, but also seemingly bucking the trend of falling house prices. At the same time, the forward order book remains at a healthy £1.96 billion, albeit slightly lower than the previous £2.14 billion.

The operating margin is also standing firm at 19.5%, while net cash of £422 million is up from the £410 million reported in April. With a tight grip on its own developments and with build cost inflation now having fallen to negligible levels, the group is seeing some benefit from its strategy despite the clear challenges ahead.

With this in mind, a particular highlight of this release is Berkeley’s outlook, which shows clear signs of defiance and confidence in future profits, The company had previously guided that it expected pre-tax profit of £1.05 billion for each of the next two years. That has now been extended to three years, and at the higher estimate of £1.5 billion, alongside which it is expecting net cash over that period to remain in excess of £400 million. A future gross margin value of £7.2 billion gives a large degree of comfort to prospects.

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Those are a clear signal of what Berkeley is able to achieve with the current hand which it is being dealt. The propensity for shareholder returns is therefore not under threat for the moment, with the possibility of future share buybacks later in the year still on the table.

In the meantime, the dividend yield of 2.6% is far from being among the most generous in the sector, but the policy is progressive and the ability to generate cash still in place.

Inevitably Berkeley is not unscathed by the lower levels of trading, with slightly lower revenues accompanied by a return on equity which also saw a marginal decline of 0.3% to 17.7%. To have achieved an increase of 4.6% in pre-tax profit to £298 million is something of an achievement, even if the growing list of headwinds for the sector currently shows few signs of abating.

Even so, the group’s upgrade to its medium-term outlook gives both extra visibility and comfort to investors, who have so far been rewarded for their patience.

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Over the last year, the shares have risen by 29%, as compared to a marginal gain of 0.6% for the wider FTSE 100 index, a performance which is in sharp contrast to many of its peers.

While investor sentiment is clearly far from having turned the corner, the market consensus of the shares as a 'strong hold' demonstrates a degree of optimism which is hard to find elsewhere in the sector at present.