Berkeley Group Holdings Plc

Berkeley Group Holdings Plc (LON: BKG) builds homes, parks, and public places. The Company operates in residential-led, mixed-use property developments.

On 23 June 2021, the Company will release its preliminary results for the year ending 30 April 2021.

Rationale for Valuation – Hold at GBX 4,297.00

• Berkeley's financial strength is articulated through forward sales of more than £1.7 billion, future gross margin in the land holdings of £6.4 billion and the net cash position of £954 million.
• The Company seems to be well-positioned to deliver a similar level of profitability in FY21 (which showed in last year).
• The Company has decent fundamental metrics as it has maintained a Net Margin and ROE above 18% and 6%, respectively, for the last three years.
• As per valuation metrics, Price/Earnings and Price/Cash Flow multiples are currently lower than the Homebuilding & Construction Supplies industry multiples.
• From the technical standpoint, 14-day RSI stood at around 44.73, which is supporting the upside movement.

Key Risks

• Delays or deficiencies in construction could increase costs, reduce sales volumes and selling prices.
• Changes in the United Kingdom macroeconomic environment may lead to falling demand or tightened mortgage availability.

Trading Update (covers the period from 1 November 2020 to 28 February 2021, as on 12 March 2021)

• Since the half-year of 2021, the Company has continued to trade strongly.
• During the period, Berkeley stays on track to deliver a similar profit to last year and also was in line with guidance.
• In FY21, the Company expects forward sales to be above £1.7 billion and future gross margin in the land bank to be in excess of last year's £6.4 billion. Moreover, the net cash will be almost the same at £954 million.
• Sales reservations have been robust, while enquiry levels have been consistently strong.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Looking forward, the Company expects a pre-tax return on equity to be around 15%, supported by a similar level of profitability. BKG expects to operate at zero carbon by 2030. The Board has committed to return £280 million per annum to shareholders through either share buy-backs or dividends. Since 2016, the Company has delivered consistently return to shareholders. However, the current operating environment stays volatile, due to Brexit transition period. The market fundamentals stay strong with the enduring attraction of London and the South East and low-interest rates. The Company has developed a new ten-year vision for the business to ensure Berkeley continues to deliver a positive and lasting contribution to society. Further, it continues to invest in new land opportunities by bringing more sites into production. The stock made a 52-week low and high of GBX 3,041.00 and GBX 4,900.00, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Berkeley Group Holdings Plc at the current price of GBX 4,297.00 (as on 15 March 2021, before the market close at 8:36 AM GMT) and will recommend fresh buying at the right time.

Hammerson Plc

Hammerson Plc (LON: HMSO) is a FTSE 250 listed investment management and property development company.

Rationale for Valuation – Avoid at GBX 37.45

• EV/EBITDA multiple is significantly higher as compared to corresponding multiple of the Residential and Commercial REITs industry, reflecting overstretched valuations.
• The Company’s profitability metrics are in negative territory, whereas the industry has been delivering positive numbers.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company delivered a negative return of ~51.88% in the last year and delivered lower returns compared to the benchmark Index (FTSE 250 Index).
• The Company is dependent upon funding through external sources to run its business operations.
• From the technical standpoint, 14-day RSI stood at ~88.6 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The potential credit risk from tenant defaults amid recessionary economic conditions.
• Risk pertinent to liquidity and Brexit.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 12 March 2021)

(Source: Company Website)

• The net rental income for FY20 decreased by 48.9% YoY, due to higher provisions for bad debt, tenant restructuring and the impact of Covid-19 closures.
• Led by a property revaluation deficit, the IFRS loss increased by 122.1% YoY.
• On 31 December 2020, the Group's total portfolio reduced by 24% YoY (including premium outlets).
• The Company has liquidity of £1,748 million as at 31 December 2020, with a decrease in net debt of £609 million year-on-year.
• On 31 December 2020, the gearing ratio decreased to 70% as compared with the previous year (2019: 71%), with a headline loan to value ratio of 40%.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In 2020, the household business was affected by Covid-19. In terms of 2020 results, the Company was hit hard, with an increasing number of retail failures. The Board has proposed a final dividend per share of 0.2 pence, with an improved scrip dividend alternative of 2 pence per share. It has few construction projects in the pipeline, which might not give good performance in the near-term, due to the delay of the projects and additional costs. Moreover, the consequence of the macroeconomic impact is still uncertain. The weak economic conditions can also impact the property value further. Furthermore, Brexit and Covid-19 are all presenting unprecedented levels of uncertainties. The stock made a 52-week low and high of GBX 14.05 and GBX 68.12, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Hammerson Plc at the current price of GBX 37.45 (as on 15 March 2021, before the market close at 11:30 AM GMT).

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.