Berenberg backs Berkeley Group despite sluggish London market

In a research note sent to clients, the broker argued that the group’s operating model and expertise, focused on longer-term regeneration sites with a bias towards operational risk - as opposed to financial risk - had ensured sector-leading returns over the long-term.

"However, with the London market showing no signs of a rapid recovery, returns will continue to revert to mean, and we think there are better opportunities elsewhere," they cautioned.

While Berkeley’s FY 2019 numbers came in 9% ahead of consensus (boosted by the transition to IFRS 15), the analysts cut their estiamte for profits before tax in 2020 by approximately 4%, but boosted expectations for 2021 by 7% as volumes are expected to recover in the latter year, leaving overall forecasts over the two-year period in line with consensus.

Factors such as affordability, tax changes, stamp duty and Brexit have contributed to a slower London sales market so that Berkeley was now transitioning away from a period of super-normal profitability.

Hence, the company's operating margins were mean reverting to approximately 20% in the medium term.

Against that backdrop, the analysts praised management taking steps to de-risk the balance sheet.

"While land opportunities are increasing, management seems unwilling to pull the trigger to any great extent in the current environment. Should the market see a marked correction and distressed sellers emerge, we would expect Berkeley to materially increase its land purchases," the analysts said.

The analysts added that Berkeley's intention to return £280m to shareholders annually until at least 2025, even in the event of an additional £400m investment in working capital during the current year, further demonstrates the strength of the company’s balance sheet.

Berkeley Group's shares were up 1.33% at 3,573.00p at 1043 BST.