Ambitious 2035 Strategy And Build-to-Rent Expansion Boost Prospects, But Rising Costs And Regulatory Challenges Threaten Margins

Key Takeaways

• Berkeley 2035 strategy focuses on brownfield development and build-to-rent expansion, aiming to drive long-term revenue and earnings growth.
  
• Flexible capital allocation plans and anticipated market improvements suggest strong future cash flow, increased sales, and enhanced shareholder returns.
  
• The transition to new regulations and increased taxation and costs may challenge net margins, impacting long-term profitability and revenue stability.

Catalysts

Engages in the residential-led and mixed-use property development and ancillary activities in the United Kingdom.

• Introduction of Berkeley 2035 strategy focuses on long-term growth via capitalizing on brownfield land development opportunities, potentially increasing future revenue and earnings.
  
• Improvement in the planning system, particularly for urban brownfield sites, could unlock existing land value, enhancing future net margins through more efficient development processes.
  
• Planned expansion of the build-to-rent portfolio is anticipated to drive future value and net income, positively impacting earnings and cash flow.
  
• Flexible capital allocation with £7 billion identified for investment over ten years, including potential share buybacks and dividends, shows confidence in strong future cash flow and shareholder returns.
  
• Improved and stable market conditions anticipated to facilitate increased sales volumes and optimize site delivery, potentially leading to higher revenues and consistent operating margins.

Berkeley Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Berkeley Group Holdings's revenue will decrease by -1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.0% today to 13.5% in 3 years time.
• Analysts expect earnings to reach £329.4 million (and earnings per share of £3.24) by about December 2027, down from £381.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £370.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2027 earnings, up from 10.6x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Berkeley Group Holdings Future Earnings Per Share Growth

Risks

• The transition to a new building safety regime and regulator may lead to increased costs and potential delays in projects, potentially impacting net margins and overall earnings.
  
• Inflationary pressures over recent years have significantly raised build costs by over 40%, which might continue to squeeze profit margins and impact net profitability.
  
• Development viability is challenged by high levels of taxation, including a proposed additional building safety levy and a 4% residential property developers tax, which could reduce net earnings.
  
• Fluctuations in the real estate market, as evidenced by a 1/3 decrease in sales volumes compared to 2023, could impact revenue stability and long-term profitability.
  
• Dependency on continued improvement in the planning system for unlocking development opportunities introduces execution risk, which can affect future revenue and return on investment.

Valuation

• The analysts have a consensus price target of £48.05 for Berkeley Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £56.0, and the most bearish reporting a price target of just £40.44.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £2.4 billion, earnings will come to £329.4 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 8.7%.
• Given the current share price of £39.74, the analyst's price target of £48.05 is 17.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.