UBS upgrades Berkeley Group to “buy,” citing strong valuation and earnings outlook
Investing.com -- UBS Global Research has upgraded Berkeley Group (OTC:BKGFY) Holdings (LON:BKGH) to a “buy” from “neutral” rating, citing a compelling valuation and strong earnings visibility, in a note dated Monday.
Despite a 14% decline in the stock over the past year, analysts believe the current share price offers protection, especially with the company’s strong earnings outlook and the potential of its Build to Rent (BTR) investment portfolio.
Shares are trading at 1.1 times price-to-net asset value, well below the long-term average of 1.5 times. UBS argues that this sharp decline reflects an overly pessimistic outlook.
The market currently expects a substantial fall in earnings, with projected EBIT of around £430 million in perpetuity, well below the company’s forecast for £975 million in pre-tax profit over FY25/26.
Furthermore, the current share price is 15% below UBS’s conservative liquidation value for Berkeley, offering additional protection.
UBS’s more optimistic scenario anticipates EBIT of around £500 million over the next four years, with gradual growth to £600 million in the medium term.
The BTR portfolio, valued at 120 pence per share on a net present value (NPV) basis, is seen as a key driver of future value creation.
UBS models an unlevered internal rate of return (IRR) of around 11%, which could rise with leverage or a reduction in exit yields.
UBS notes that the valuation de-rating is partly due to subdued profit expectations, including a modest profit decline in FY26 and a reduction in annual capital return commitments.
However, the brokerage sees upside potential, with Berkeley likely to generate excess cash from 2029 onwards and potentially monetize the BTR portfolio, unlocking additional value.
The company’s updated 10-year capital allocation plan includes £7 billion in available cash, with £2 billion earmarked for shareholder returns and £1.2 billion for BTR investments.
UBS believes that excess capital, along with the eventual monetization of the BTR portfolio, will provide additional flexibility for future capital distribution.
Berkeley’s commitment to the BTR strategy, with an initial investment of £1.2 billion, is seen as an attractive opportunity, offering potential for 11% post-tax IRR under base-case assumptions for rental growth and exit yields. Leverage or further yield compression could enhance these returns.
UBS’s price target for Berkeley has been reduced by 8% to reflect changes in earnings forecasts and updated assumptions, with the new target based on a weighted average cost of capital of 9% and a return on capital employed of 17.5%. The BTR portfolio is valued at 120 pence per share on an NPV basis.
