On Tuesday, Barclays (LON:BARC) upgraded Berkeley Group (OTC:BKGFY) Holdings Plc. (BKG:LN) (OTC: BKGFF) stock rating from Equalweight to Overweight and increased the price target to £53.22, up from the previous target of £50.65. The upgrade reflects Barclays' belief that the market has undervalued Berkeley's build-to-rent portfolio, which they see as an opportunistic use of land that adds value, rather than a drag on the company's asset turnover.
Berkeley Group's stock is currently trading at a multiple similar to its peer Persimmon (LON:PSN), at 1.1x EV/IC, which Barclays considers to be too conservative. They argue that this valuation implies expectations of a permanent and significant reduction in Berkeley's historical return on invested capital (ROIC), a view they regard as overly pessimistic.
The analyst highlighted the company's announcement of a new 10-year investment plan as a significant positive development. Historically, Berkeley Group has demonstrated an ability to time its land purchases and work-in-progress investments effectively, often outperforming its peers and generating above-average returns.
Barclays' updated price target is based on the assumption that Berkeley Group will produce a long-term ROIC that is 35% below its historical average. Despite this conservative assumption, Barclays sees a 38% potential upside in the stock, indicating confidence in the company's future performance.
The upgrade and new price target by Barclays suggest a positive outlook for Berkeley Group, as the firm anticipates the company's strategic investments and market positioning to yield strong returns moving forward.
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