Interactive Investor

Bellway built to withstand this industry slowdown

13th June 2023 08:48

by Richard Hunter from interactive investor

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Conditions are difficult for many reasons, not least the impact of rising interest rates on demand for new houses. But our head of markets sees long-term support for this mid-cap housebuilder.

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Notwithstanding the broader issues facing the sector, Bellway (LSE:BWY) continues to plot a careful course with particular focus on the areas within its control.

The group remains on solid ground in terms of its balance sheet, with a net cash position and a selective land acquisition policy. With a healthy land bank already in the background, Bellway can afford to be more choosy in those plots which it considers will have the necessary rate of return, while it has also been refining its financial discipline and its relationship with supply chain partners.

The latest quarter has seen a sustained improvement in sales demand, particularly compared to the previous quarter and largely to be expected as an increase in the traditional seasonal interest kicks in. However, while the quarter on quarter picture is rosy, the year on year comparison shows the scale of the sector challenges, with overall reservation rates dropping by 25%. By way of mitigation, the group has introduced targeted incentives in certain parts of the country in a bid to boost demand.

Even so, the demand comparison lays the challenges bare. House prices have shown some signs of weakness (the average selling price for Bellway has dipped to £300,000 from a previous £314,000) and mortgage availability has lessened, with some lenders withdrawing new deals. At the same time, mortgage affordability is also becoming more of an issue, particularly to first-time buyers, with the expiry of the Help to Buy scheme adding to a general malaise for the spending power of the UK consumer.

Further expected interest rate rises in the UK are likely to exacerbate the situation, although Bellway does make the point that affordability remains less of an issue for some potential buyers given ongoing wage rises across the economy.

Build cost inflation has been another issue and has been reported at between 8% and 10% by most of the players within the industry. More positively, Bellway expects the issue to ease over the remainder of the year, as lower demand for construction materials has resulted in better product availability, while more general inflationary factors are also showing some tentative signs of tailing off.

In terms of legacy problems as evidenced by the various cladding issues for example, Bellway is another housebuilder which has been forced to make reparations. The group has previously announced and is maintaining a provision of £570 million for what it describes as the remediation of legacy apartment blocks, which of course has been an unwelcome (but necessary) drain on capital.

Elsewhere, the group has also highlighted a robust forward order book of £1.7 billion, although down from a previous £2.4 billion, with pricing remaining firm across most of its markets. Net cash is expected to rise to £200 million by the year end and, in the meantime, the company continues with a shareholder return policy with the previously announced £100 million share buyback programme ongoing, and with a heady dividend yield of 6.3% providing some comfort to investors who have experienced share price turbulence over recent times.

In all, Bellway is navigating a difficult set of challenges with some aplomb, backed by a previously acquired land bank which gives it the luxury of more selective buying activity for future plots. At the same time, its financial position remains robust and it notes but of course cannot control the wider problems which are facing the sector and indeed the economy as a whole.

Despite a share price increase of 18% over the last six months, the shares have dipped by 1% over the last year, as compared to a marginal gain of 0.2% for the wider FTSE250. Challenges aside, it is traditionally not difficult to find supporters of the longer-term prospects for UK housebuilders, and the market consensus of the shares as a 'strong buy' indicates that many believe Bellway is a strong growth prospect for the years to come

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