Housebuilders have suffered a brutal sell-off at the hands of investors, but not all have been equally punished. Berkeley shares might have lost almost 20 per cent of their value since the start of this year but that is a less severe decline than any of the other London-listed players. There is more merit in holding the shares over many rivals.
Berkeley has long been valued at a premium to the rest of the London-listed housebuilders. Why? The vast scale of its owned land bank is one reason and superior operating margins is another. A rich cash pile on its balance sheet is also reassuring to investors. Its niche as a brownfield developer and focus on London, where building up as well as out is a greater feature, means there is scope for Berkeley to replan sites and squeeze more out of the same plot of land. None bar Persimmon, which has gained an edge by buying land without planning permission in return for a cheaper price, have come close to Berkeley on operating margins over 20 per cent.
Still, the group naturally faces all the same macroeconomic pressures as its peers. That is reflected in an erosion in the premium baked into the shares against the value of the group’s assets. The shares trade at about 1.29 times forecast book value, below a long-running average multiple of 1.8 and close to the lows recorded in the immediate aftermath of the March 2020 lockdown.
Reservations have fallen by about a quarter since the end of September and cancellation rates have risen to around 20 per cent in recent weeks, from a typical rate in the early teens. Completions will be scaled back in the face of a tougher housing market. The result? Profit expectations for the next two financial years have been cut to a combined £1.05 billion, down from £1.25 billion in its forecast six months ago. An average sales price of £560,000 was lower than the £647,000 in the first half of last year, a decline that management attributes to a change in the mix of properties sold during the period. Berkeley developments are less centred on the most central areas of London and more spread towards the outer zones. But it is all relative.
Prior to the pandemic house prices in London had slowed compared with other regions as affordability constraints stifled sales price growth. In October London was the only region to record a monthly decline in sales prices, according to the latest house price data from the Office for National Statistics. Growth in the southeast of England was an anaemic 0.1 per cent. Properties are forward sold, so like lower volumes, weaker sales prices will filter through in the next financial year.
The gap between sales prices and building costs is narrowing. Analysts at Peel Hunt forecast an operating margin of 21.3 per cent next year, below the 23.5 per cent it expects for the 12 months to the end of April. Inflation has started to ease, but building materials and labour costs remain higher than the norm.
Plans to return £283 million a year, which equates to 260p a share, through dividends or share buybacks through to September 2025 are intact. Peel Hunt has forecast a dividend of 270p a share next year, which would equate to a dividend yield of 7 per cent at the current share price. Berkeley has about £2.3 billion in cash due on properties forward sold and scheduled for completion in the next three years.
Together with customer deposits at an estimated £940 million and a forecast revenue from housing associations of roughly £650 million, that equates to almost 80 per cent of the revenue forecast by analysts at Berenberg over the next two years.
The market is already pricing in harder trading ahead for Berkeley but the worst of the share price fall might be passed.
ADVICE Hold
WHY The shares are priced at a discount but that reflects tougher trading conditions
B&M European Value Retail
You might think that B&M’s tilt towards discount shopping would allow the retailer to hold, or even gain, market share over more expensive rivals. But the case for it being a beneficiary of shoppers trading down has yet to be proven.
Like-for-like sales are back in growth after a post-pandemic comedown pushed revenue for the first half of the year down by just under 4 per cent. Sales going into the peak Christmas period were also up 2.5 per cent for the core UK business.
The retailer purchases fewer product lines but buys in bulk, which it says helps in offsetting the higher product costs. Much of its general merchandise is bought directly from factories rather than third-party suppliers. That helps with maintaining a price edge.
But roughly half the group’s sales are in non-food categories, so it is still exposed to consumers cutting discretionary spending. Marking down more products, particularly garden ranges, meant the gross margin in the core UK business declined to 34.9 per cent, from 37 per cent the same time last year. Inventory levels had fallen by about £50 million by the end of September, compared with a year ago.
Yet hitting profit guidance of £550 million to £600 million for this year implies a recovery in the general merchandise gross margin above historical levels, analysts at Numis reckon. Recovering margins fully over the second half of the year seems like a “high hurdle” in recession, the brokerage thinks, forecasting profits just below guidance at £540 million.
At 12 times forward earnings, the stock looks cheap relative to B&M’s own history. But then the outlook for consumer spending and the cost of operating is also much darker. Compared with other retailers, the stock’s valuation looks less compelling. Net debt stood at only 1.3 times adjusted earnings at the end of September, way below a target ceiling of a multiple of 2.25, which means there could be scope for more special returns to shareholders. A forecast ordinary payment of 16.9p a share would represent a decent dividend yield of 4.1 per cent at the present share price. But there is room for B&M to disappoint on margins again.
ADVICE Hold
WHY Risk of margins being weaker than expected