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Participations of the Berkeley group (LSE:BKG) is a major UK housebuilder and I think it could be a good value investment based on my discounted cash flow analysis. The company is in FTSE 100and its main markets are in London and the South East.
These are the main reasons why I think it's not unlikely that the stock could grow 20% over the next 12 months.
Main markets and competition
When I was reading the company's 2023 annual report, I came across this chart, which shows the investment potential due to real estate market growth in Berkeley's major operating areas in the near future:
However, that wasn't enough to pique my interest. I also wanted to know how the company has historically performed against its competition. Therefore, I compared it to two other major UK housebuilding players: Barratt Developments and Khaki.
First, I plotted the three investments based on historical share price growth, in which Berkeley recently took the lead:
Created in TradingView
Next, I compared the three companies in terms of their net income margin. Berkeley has consistently been at the top of the pack and currently retains its number one position:
Created in TradingView
Other finances that I like
In addition to the market opportunities and competitive strengths mentioned above, there are other elements I like about the investment.
For example, its balance sheet is stable. While it could use some improvement, 49% of its assets are equity balanced, meaning it doesn't have too much debt at the moment.
In addition, the growth of its income in three years is very high, with an average of 16.4% per year.
I noticed the 31% discount
Now, accurately predicting a discount on an investment is essentially impossible, which is why I make estimates based on financial forecasts.
Berkeley has a lot going for it when I look at its future earnings growth relative to its current price. Over the past 10 years, it has grown its earnings at an average of 9% annually.
So, if it can maintain this over the next decade, the stock appears to be selling at a 31% discount right now. I used a method called discounted cash flow analysis to calculate this.
If my estimate is correct, the stock price could rise faster than normal if financials remain stable. The reason for this is that investors like me should take advantage of the value opportunity, which would cause an influx of shares to be purchased and the price would rise as a result.
I have a price appreciation target of 20% in one year. While this is not guaranteed, I expect considerable growth in any case.
Critical risks
As seen in my chart above, Berkeley's net margin is lower than before right now. If this trend continues, it could mean the company becomes less profitable in the long term, and that could affect my valuation estimate.
In addition, the company's dividends have decreased by 8.8% on average annually over the last three years. That could be daunting if I wanted to earn passive income from my investment in the business.
on my watch list
While Berkeley has a lot to offer, I'm taking my time at this time and not rushing into making a decision.
It's on my watch list for the next time I invest.
