Berkeley Group: growth at pace if not the share price

It's not been a great year for the housebuilding sector. Our head of markets runs through the highlights and lowlights in these annual results.

Berkeley Group Holdings (LSE:BKG) continues its growth at pace, although the disconnect between its trading performance and share price performance remains significant.

The sector as a whole has been downgraded on fears of inflation, the propensity of consumers to buy given the tightening economic environment and a rising interest rate environment which puts further pressure on affordability. Supply chain constraints and a generally dour outlook on UK economic prospects complete the mix, despite the fact that for the most part the housebuilders continue to deliver.

For Berkeley, a busy period of acquisitions seems to have been completed for now, with the group stating that it will only be undertaking selective acquisitions in the immediate future as it concentrates on unlocking the value from the purchases it has made.

The latest of these was the acquisition of the remaining 50% stake of its joint venture from National Grid for £412.5 million, which helped push the group beyond its own target of £7.5 billion of estimated future gross margin. That figure currently stands at £8.3 billion, and with underlying sales reservation values up by 25%, rising prices have absorbed any cost inflation which may have concerned investors.

Indeed, the company’s focus on London and the South East also sets it apart somewhat from many of its competitors. Despite many brownfield projects and the company being responsible for 10% of London’s new private and affordable homes, the average selling price remains at a heady £603000. Even the recent opening of the Elizabeth Line is likely to have a positive impact, with Berkeley already noting an uplift in properties along the line in London and the Thames Valley.

At the same time, London’s pre-eminence as a cultural and investment destination has also played into the group’s hands, with the return to normality resulting in a general reinforcement of urban working and living,

Pre-tax profits for the year have risen by 6.4% to £551.5 million, exceeding expectations, while a Return on Equity of 17.5% is also an improvement from the previous 16.5%. Net cash has dropped to £269 million from a previous £1.1 billion given the group’s capital spending, but nonetheless remains a comfortable cushion for any exceptional purchases should the need arise.

In the meantime, at current levels and including specials the dividend yield is a whopping 10%, although a mixture of share buybacks and general capital returns are likely to bring this figure down at the next dividend announcement in August. Even so, the housebuilders are generally a rich source for generous dividend returns, and especially while they continue to flourish.

The outlook is also promising as the group aims to continue its momentum. Apart from an increase of 42% in homes delivered, cash due on forward sales currently stands at £2.2 billion and the group has reported a stable start to the new financial year in terms of visits, enquiries and reservations.

The group now stands poised to deliver on the next phase of its strategy even though the share price has hardly kept up with developments. The price has fallen by 24% over the last year as compared to a gain of just 0.9% for the wider FTSE100, and has been hampered again today set against a weak market opening. Even so, the market consensus of the shares as a buy remains resolutely intact in anticipating brighter times to come in the longer term.