Interactive Investor

Bellway is on the growth offensive

19th October 2021 08:30

Richard Hunter from interactive investor

After a strong recovery from the pandemic lows, Bellway shares have travelled sideways since. Some say the company’s efforts have not been fully appreciated.

Bellway (LSE:BWY) has defended its corner well in the face of any number of challenges, while at the same time positioning for future growth with an aggressive land acquisition programme.

The record number of acquisitions has required a spend in excess of £1 billion, but these are generally higher-margin sites which promise superior returns in forthcoming years.

In the meantime, and despite the limitations imposed by the pandemic and intermittent lockdowns, the company has steered a careful course and has emerged with a balance sheet in good shape and cash generation given a generally supportive backdrop.

The key metrics are, for the most part, a representation of Bellway’s punchy strategy. Housing completions are up by 35%, there is a strong improvement to gross margin which now stands at 20.9%, and the private reservation rate is 20% ahead of 2020 and 5.6% ahead of 2019.

At the same time, there is a record order book which currently stands at £1.97 billion, all of which is underpinned by net cash of £330 million. In turn these figures have propelled revenues ahead by 40%, with pre-tax profit more than doubling to £479 million.

In another statement of intent, there has also been a significant increase in the dividend payment, which implies a yield of 3.5%. Not only is this a worthwhile yield given the current interest rate backdrop, the possibility of a return to the previous levels of around 4.5% cannot be discounted as the company retains gas in the tank.

Perhaps equally impressively, Bellway has also addressed each of the concerns which have tended to overhang the sector of late.

The rise in building costs has been generally offset by the increase in house prices, the business model is being tweaked in anticipation of changes to the “Help to Buy” scheme, and blockages in the supply chain have been mitigated by forward planning and strong procurement discipline.

Some uncertainty remains on the immediate future for interest rates, even though any spike is unlikely to be unduly damaging, while the general economic health of the nation will determine consumer confidence and, indeed, the propensity to buy. Even so, the scene is set for future growth, with mortgage availability remaining high and the ongoing supply shortage in the UK showing no signs of subsiding.

Bellway’s share price has been pegged back slightly of late given the wider economic concerns, but over the last year is ahead by 28.5%, exactly in line with the growth of the wider FTSE250 index. There have been some concerns that the company’s efforts have not been fully appreciated, although this is certainly not the case in terms of the market consensus, which remains highly optimistic on prospects, coming in at a strong buy.

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