In its AGM trading update, developer Berkeley Group (LON:BKG) said it had seen no upturn in the housing market since April. The firm said the ongoing Middle East conflict and political change had further impacted sentiment and core economic indicators.
Profits to be H1 weighted
Although enquires are ‘good and stable’, only customers who have finance and need to move are buying properties. Customers who don’t need to move immediately and without readily available liquidity ‘remain more cautious to commit’.
Moreover, the firm expects some customers to defer buying until after the Budget at the end of October. As it stands, it expects profit to be weighted slightly towards H1 subject to completions.
Net cash is seen in the region of £250 million in H1, after buybacks and investment in the Build to Rent platform. So far this year, the firm has bought back £60 million worth of shares.
Sticking to its four-year plan
Despite the short-term headwinds, Berkeley Group is sticking to its four-year plan to reach £1.4 billion in pre-tax profit. To do this, it has reduced its output target by 25% to focus on cash generation ahead of short-term profits.
The firm says from the end of FY27, reducing output and pausing land investment will drive improved net cash flow. That will allow it to either increase investment in the business, once conditions improve, or increase shareholder returns.
Sharp decline in residential building
According to the latest S&P Global UK Construction PMI survey, the industry saw a ‘sustained downturn’ in August led by weakness in housebuilding. The index tracking total construction activity fell to 44.3 in August, below the 50 ‘neutral’ level for the twentieth consecutive month.
The Infrastructure, Commercial and Residential subsectors all saw a downturn in activity. However, Residential was the only subsector where the fall in August was faster than July.
‘Business optimism was still subdued, as growth projections eased since July and were much weaker than historic trends’, observed S&P Global Economics Director Tim Moore. ‘Concerns about geopolitical tensions, lacklustre domestic economic prospects and elevated borrowing costs were all noted as holding back confidence.’
When Berkeley Group says profit may be H1 weighted, what it means is it has no visibility regarding H2 earnings. Given buyers are already more cautious due to geopolitics and interest rates, that’s not very encouraging.
Another thing we take issue with is this notion of share buybacks being ‘shareholder returns’. Buybacks reduce the number of shares, inflating earnings per share, but unlike dividends they don’t return cash to shareholders.
If a company’s shares are trading at a big discount to intrinsic value, on paper buybacks can add value. However, that only holds if the company doesn’t have any better options, like investing in the business or reducing debt.
Our key takeaway from today’s update though is Berkeley Group has no clearer view on the housing market than anyone else. Neither the builders, the housing portals nor the lenders have any insight into when this market finally turns, which makes the whole sector dead money.
