Berkeley cash bonanza fails to boost shares

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Berkeley is being as good as its word when it comes to returning cash to its shareholders, popping a further £334 million into their pockets and promising more to come, but the shares are not responding,

This may be the result of an unchanged profit outlook, uncertainty over the future of housing in major metropolitan areas in the wake of the pandemic and also Berkeley’s valuation, as the shares already trade close to the two times multiple of (historic) book value which is often seen as the ceiling for housebuilding stocks.

Shareholders will nevertheless be delighted to see Berkeley generate a small increase in pre-tax profit, despite the very difficult backdrop, and stick to its profitability and housing volume targets out to 2025. The firm’s return on equity target equates to annual pre-tax profits of around £500 million – compared to the £518 million attained in the financial year to April 2021.

Source: Company accounts, Marketscreener, consensus analysts' forecasts. Financial year to April.

Meanwhile, Berkeley continues to aim for a 50% uplift in housing completions to around 5,500 a year.

Source: Company accounts, management guidance for 2025E. Financial year to April.

Add in a phenomenal average selling price of £770,000, almost three times the national average house price of £261,743 cited by the latest Halifax survey, and some may wonder why Berkeley is not expecting its profits to advance more rapidly. But the firm takes great pains in its statement to explain the issue of sales mix, the complexity of the brownfield sites in which it specialises and the efforts it is making in its drive toward carbon neutrality and site biodiversity, all of which are likely to come at some cost.

Nevertheless, Berkeley is still recording an operating margin of 22.8%. Such fat returns on sales usually translate into healthy free cash flow and that in turn usually translates into cash returns for shareholders, once bills such as interest and tax are paid and key investment needs are met.

This still provides the core planks of the investment case for Berkeley. Since 2011, the company has returned £2.2 billion in cash to its shareholders – good going for a firm whose market cap is £5.6 billion now and whose valuation a decade ago was just £1.5 billion. Anyone who owned shares in Berkeley then will now own them for free, with cash on top, and still possess their stake in the company’s operations and assets.

Further cash returns are coming too, thanks to the plan to return £281 million a year via dividends and buybacks out to 2025 and the planned B share scheme.

Source: Company accounts

That may well be enough to keep patient investors interested, while they may be also tempted to argue that Berkeley’s valuation is far from excessive given its asset backing, cash flow and yield

Granted, the shares trade toward to upper end of the one-to-two times book value range which analysts often use as a rule of thumb to decide whether housebuilders’ shares are cheap (one times) or expensive (two times).

Historic Price/NAV(x) 2021E PE (x) 2022E PE (x) 2021E Dividend yield (%) 2022E Dividend yield (%) 2021E Dividend cover (x) 2022E Dividend cover (x)
Vistry 1.22 x 10.1 x 8.7 x 4.0% 5.4% 2.45 x 2.15 x
Redrow 1.24 x 9.7 x 8.8 x 3.0% 3.8% 3.47 x 3.04 x
Bellway 1.31 x 10.5 x 9.3 x 3.3% 3.7% 2.87 x 2.90 x
Crest Nicholson 1.34 x 16.6 x 12.0 x 2.4% 3.2% 2.50 x 2.57 x
Barratt Developments 1.37 x 10.9 x 9.3 x 4.0% 5.4% 2.29 x 1.97 x
Taylor Wimpey  1.48 x 10.9 x 8.6 x 4.7% 7.4% 1.96 x 1.58 x
Berkeley Homes 1.76 x 13.5 x 12.8 x 4.9% 5.0% 1.50 x 1.56 x
Countryside Properties 2.28 x 23.4 x 13.6 x 1.4% 2.6% 3.00 x 2.77 x
Persimmon 2.72 x 12.4 x 11.6 x 7.8% 7.8% 1.03 x 1.10 x
Average 1.64 x 11.9 x 11.9 x 4.8% 5.7% 1.75 x 1.71 x

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, Refinitiv data

But if Berkeley keeps churning out £500 million in annual profits then book – or net asset – value per share should rise over time and potentially drag the share price along with it, supplementing the cash returns along the way, providing the stock does not suffer a de-rating for any reason.

Source: Company accounts

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.