Bellway makes progress and reveals unexpected bonus

While the housebuilding sector remains on shaky foundations, Bellway (LSE:BWY) has provided some grounds for optimism with a defiantly positive performance.

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Revenues of £2.78 billion in the year ended 31 July represented an increase of 16.9% from the previous year, while underlying pre-tax profit spiked by 27.9% to £289.1 million, ahead of the group’s £284 million estimate at its recent trading statement. Underneath the bonnet Bellway also ground out some higher key metrics, with gross margin increasing to 16.4% from 16%, a net debt position of £10.5 million transformed into net cash of £41.8 million, and an increase in land bank plots to 95,704, including contracting to buy 8,120 plots during the year. The latter shows the group’s financial agility to move when it sees plots emerging which fit in with its longer term profit hurdles.

In addition, housing completions over the year rose by 14.3% to 8,749, with an average selling price of £316,412 which compared to £307,909 the year previous. Despite the recent surprise decline in house prices which was reported, the group expects this number to rise to £320,000 over the coming year, while maintaining its underlying operating margin of 11%, leaving the company on track to meet its target of 20% cumulative volume growth in the two years to July 2026.

In terms of outlook, the forward order book currently stands at 5,285 homes after the end of this reporting period, up from a corresponding 5,164, with a value of £1.53 billion as compared to a previous £1.45 billion. The tailwind from the improved financial performance has led to the announcement of a £150 million share buyback programme which, all things being equal, should be supportive to the share price and also well received by investors. The 30% increase to the dividend takes the projected yield to 2.8%, which remains low by historic standards given last year’s cut from 140p to 54p. Nonetheless, both measures show some confidence in prospects by the group’s management.

Even so, many hurdles remain in this cyclical sector.

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An increase to stamp duty in April followed uncertainty which has been hanging over the sector, with affordability being a particular headwind. The speed and number of interest rate cuts is also in question, which could affect consumer confidence and propensity to buy, while there is evidence of buyers holding back ahead of the upcoming Budget.

Indeed, Bellway has noted that while private reservations per outlet per week improved over the course of the year, there was less interest in the final quarter which has spilled over to the current trading situation.

This weak consumer sentiment, which has now been in force since late spring, has led to further calls from the sector for the government to accelerate the proposed relaxation of planning regulations, which is far from taking full effect. Quite apart from the spectre of the Budget, there are also general affordability concerns, particularly for first-time buyers, which need to be addressed to give this cyclical sector an overdue boost.

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Despite its measured progress, the share price tells the story for Bellway. A positive recent trading statement has led to a spike of 8% in the last six months, but this rally is not sufficient to arrest a decline of 18% over the last year, as compared to a gain of 6% for the wider FTSE250.

The shares remain 33% lower than their pre-pandemic peak in February 2020, which underlines the scale of the revival needed for the group to regain its former glories. Even so, investors are tending to recognise the recovery potential, and the share buyback programme announcement is an unexpected bonus. As such, the initial price reaction to the news has been positive and particularly notable against a weaker wider market. The general consensus of the shares as a buy signals further recognition of the group’s sterling progress and will be consolidated following these numbers.