Numis upgrades Berkeley to 'buy' from 'add' after first half earnings

Berkeley Group’s shares rose on Friday as Numis raised its rating on the property developer to ‘buy’ from ‘add’ and reiterated a target price of 3,844p following better-than-expected first half results.

In the six months ended 31 October, pre-tax profit gained 33.9% to £392m compared to the same period a year earlier, exceeding estimates of about £351.7m. Revenue rose 24.1% to £1.41bn, beating expectations of £1.31bn and driven by sales of new homes in London and the South East of England.

Berkeley added that cash due of forward sales of £2.9bn, an estimated land bank gross margin of £5.9bn and net cash of £208m, meant the group is on target to deliver a new five-year target of at least £3bn pre-tax profit beginning 1 May 2016. It has previously indicated a three-year target for pre-tax profit of £2bn from 1 May 2015.

However, Berkeley said Brexit, the US election and an increase in stamp duty in April had hurt transaction levels throughout 2016. Excluding a hiatus around Brexit, reservations for the period remain 20% down on the same period last year.

Numis welcomed the group’s new pre-tax profit target. The broker said it is on track for more than £750m of pre-tax profit in 2017 and 2018 and at least £1.5bn in the three years to April 2021, or £500m per year.

"Overall we think this is a decent update and the longer term guidance over PBT (being at least £500m per annum) should give comfort there is not a cliff edge in profits after the following two years," Numis analysts said.

"Furthermore, the reservation number is consistent with what was previously announced and therefore this should also provide some comfort."

Shares increased 4.17% to 2,656p at 0908 GMT.