Investing in the housebuilding sector is a long-term pursuit and the announcement of a new “Berkeley 2035” growth strategy highlights this approach.
The strategy has a number of strands, with the headlines being projected growth in the Return on Capital Employed, further investment in the group’s recently launched “Build to Rent” platform and an ongoing focus on shareholder returns.
Some £7 billion of free cash flow has been identified to underpin the strategy over the next ten years, where the group plans to maintain its historic operating margin range of between 17.5% and 19.5%. in addition, the available capital can be allocated between any or all of the three main objectives as the landscape evolves and this flexibility should play to the cash moving to where it is most needed.
In the meantime, the group has announced pre-tax profit of £275.1 million, a decline of 7.7% from the corresponding period, but ahead of the £269 million which had been estimated. Revenue grew by 7.3% to £1.28 billion, in line with expectations, driven by selling more new homes (2103 versus 1785) which more than offset the lower average selling price of £600000 from a previous £624000.
This was achieved despite the wider issues which have clouded the sector after an initial bump following the UK election. Consumer confidence remains extremely guarded, the possibility of higher for longer interest rates is keeping some potential new buyers on the sidelines, while the group also notes the overhang of additional building regulations as part of the new industry regulator’s formation.
These issues have been partially offset, however, by the advantages which the group obtains from focusing mainly on London and the South East. Higher house prices follow on from a systemic undersupply of homes, employment levels remain strong and the recent round of wage rises (while inflationary) has helped mitigate some of the problems. Even so, this has resulted in the forward order book falling to £1.51 billion from a previous £1.7 billion, with transactions down by around a third since the previous full financial year.
For the moment, therefore, it falls to Berkeley (LON:BKGH) to pull the levers at its disposal to maintain momentum. It has managed to achieve an improved operating margin of 20.2%, up from 19.5% and ahead of its long-term average, while net cash of £474 million and access to £1.2 billion of borrowing results in total liquidity of £1.7 billion, laying a strong foundation. In terms of shareholder returns, the buyback programme remains on track while a dividend yield of 1.6% is boosted to an attractive 5.8% including specials.
Despite the current challenges, Berkeley has maintained its profit guidance of £525 million for the current year as well as £450 million for the next. This would match the group’s previously stated objective of £1.5 billion over this three-year period, with its focus on the more upmarket end of the housing spectrum proving to be something of a shield against what has been a difficult few years for housebuilders.
Until such time as consumer confidence returns and the revitalised planning system is able to bed in, the sector as a whole is likely to remain under some pressure. Indeed, Berkeley’s share price has fallen by 16% over the last year, as compared to a gain of 11% for the wider FTSE 100, with a drop of 24% over the last six months contributing to the net decline.
Well-regarded though the company may be, the market consensus of the shares as a hold implies that investors are not yet quite convinced that the new strategy and the existing sector obstacles are at the required inflection point.