Berkeley Group Holdings PLC (LON:BKG) has been downgraded to ‘Sell’ from ‘Hold’ by City broker Shore Capital amid concerns that the high share price is too expensive when viewed in relation to profit guidance.
Analysts said that despite the FTSE 100 house builder upping its near-term guidance, “the more important later years’ forecasts that reflect the ‘new’ Berkeley Group remain unchanged and indicate that PBT [profit before tax] is likely to move materially lower”.
READ: Berkeley Group slides as it hints of tougher times ahead
They added: “The board has now guided three times that estimated profits in FY2020F and FY2021F are likely to be nearer £500m PBT or 300p of EPS [earnings per share]. This leaves the shares looking expensive even after the recent falls, with a PE [price/earnings ratio] for FY2020F of almost 13x, a significant premium to the rest of the sector.”
The broker said it saw a fair value of 3350p for the shares, a 10.8% discount to the last close price of 3,757p, citing that the shares were currently “over-bought and we switch from hold to sell on valuation grounds”.
In its full-year results last week, Berkeley increased its profit guidance by £75mln to at least £1.575bn for the two years ending 30 April 2019 and by a similar amount to at least £3.375bn for the five-year period which began on 1 May 2016.
However, the firm also cautioned that these results reflect a peak for Berkeley, with profitability returning to more normal levels from 2018/19, when profits are anticipated to be around 30% lower. Thereafter Berkeley will target a 20% pre-tax return on equity over the cycle, depending upon the level of cash, which currently includes around £400mln excess due to macro uncertainty, it said.
In mid-morning trading, Berkeley shares were up 0.5% at 3,777p.