Berkeley Group shares rally after builder sticks with profit forecast

This FTSE 100 housebuilder remains bullish in this update for the first four months of its financial year and the shares are racing away from multi-year lows. Our head of markets assesses the latest outlook.

Berkeley Group Holdings (The) (LSE:BKG) has retained its upbeat tone in this update for the period from 1 May to 31 August, despite increasing signs of cooling within the UK housing market.

The company acknowledges that the operating environment remains volatile and that overall cost inflation across its portfolio is still between 5% and 10% per annum.

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At the same time, the sector as a whole remains deeply out of favour, as evidenced by the share price performance of the major players. An increasingly toxic combination of fears of persistent inflation, the propensity of consumers to buy given the tightening economic environment and a rising interest rate environment which puts further pressure on affordability.

Should this filter through to lessening demand, any decline in average selling prices would remove a plank which has enabled the housebuilders to mitigate most of the inflationary impact so far.

In addition, 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 and there remains an undoubted lack of sufficient housing in the UK.

For its part, Berkeley is maintaining its pre-tax profit guidance of £600 million for this year (and £625 million next), weighted towards the second half, and comparing with £551 million in the year past.

Forward sales, which at the full-year numbers in June stood at £2.2 billion, are expected to improve marginally, while the net cash position of £269 million remains intact. This provides the group with flexibility, although from an acquisition perspective where the company has been active, few further developments are expected for the time being.

As with its peers, cash generation also provides a healthy level of returns for shareholders. The projected dividend yield for Berkeley is around 3.4%, coupled with an ongoing share buyback programme which in theory suggests an overall return of around 7%.

Berkeley is also set apart from many of its competitors, given its focus on London and the South East. Its previous summary revealed that despite many brownfield projects and the company being responsible for 10% of London’s new private and affordable homes, the average selling price remained at a heady £603,000. 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.

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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.

However, if against this backdrop the acid test is the performance of the shares, then the housebuilders are currently failing, and Berkeley is no exception. The price has dropped by 33% over the last year, as compared to a gain of 1.4% for the wider FTSE100 and the evolving landscape for the property market is becoming more challenging.

The market consensus of the shares as a "buy" most likely reflects an increasingly undemanding valuation and perhaps equally importantly, the longer term view given the group’s access to a rarefied market in London and the South East.