Interactive Investor

ii view: early signs of a seasonal pick-up at Bellway

Shares in this mid-sized builder have comfortably outperformed the FTSE 250 index over the last year. Buy, sell, or hold?

9th February 2024 15:37

Keith Bowman from interactive investor

First-half trading update to 31 January

  • Revenues down 33% to £1.25 billion
  • Total build completions of 4,092, down from 5,695
  • Average selling price of £309,300, down from £316,929
  • Net cash of £77 million, down from £292 million

Guidance:

  • Continuing to target completions of 7,500 homes, down from 2023’s 10,945 homes

Chief executive Jason Honeyman said:

"Bellway has delivered another resilient performance in a period of challenging trading conditions.  While the economic backdrop remains uncertain, the gradual reduction in mortgage interest rates through the first half has eased affordability constraints and we are encouraged by the seasonal pick-up in customer leads and an improvement in reservations since the start of the new calendar year.   

“We have maintained balance sheet resilience and, supported by the strength of our land bank, Bellway remains well-placed to capitalise on future growth opportunities and will continue to play an important role in increasing housing supply in the years ahead."

ii round-up:

Housebuilder Bellway (LSE:BWY) today detailed trading broadly matching City expectations, with full-year forecasts unchanged and the January sales rate showing some recovery.

Reduced customer demand because of higher mortgage rates fed into a near one-third decline in first-half revenue to £1.25 billion, and full-year build completions are still expected to fall by a similar amount to 7,500. However, there was an improvement in January private sales reservations to 0.59 per outlet per week from 0.45 in January last year. Bellway said it had seen "encouraging levels of customer enquiries in the traditionally quieter winter trading period" and seen "early signs of a seasonal pick-up as we approach the spring selling season".

Shares in the FTSE 250 builder ended the day up over 1% having risen by around a quarter over the last year. That’s similar to rival Vistry Group (LSE:VTY) and recently announced takeover target Redrow (LSE:RDW), and comfortably ahead of a 5% retreat for the FTSE 250 index.  

Bellway operates through 19 regional divisions across the UK under the brands Bellway, Bellway London, and Ashberry.

The pick-up in customer demand over the first half to late January, given some reductions in mortgage rates, had seen the company open 34 new outlets with plans to open more than 40 additional new outlets in the second half to late July.  

The average selling price fell to £309,300 from £316,929 a year ago, largely due to fewer private completions and more social housing, while the value of its forward order book sat at just over £1 billion in late January, down from £1.38 billion a year ago.   

Broker UBS reiterated its ‘buy’ rating on the shares post the update. First-half results are due 26 March. 

ii view:

Started in 1946, Bellway is today focused on providing traditional family housing outside of London and apartments within London. Headquartered in Newcastle, group rivals include Taylor Wimpey (LSE:TW.), Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV)

For investors, elevated interest rates continue to make mortgage repayments less affordable for potential customers, reducing demand. Required buyer incentives are squeezing profit margins, the planning system has for some time now offered challenges, while a forecast dividend yield of around 1.9% is only modest compared with rivals.

On the upside, hoped-for interest rate cuts have seen mortgage rates easing and customer enquiries increase. The wider housing shortage has left selling prices relatively resilient, group net cash continues to be held, while the potential acquisition of Redrow by Barratt Developments could see other housebuilders following suit.

Potential Bank of England rate cuts should further assist customer demand and boost the cyclical housebuilding sector. However, the prospective dividend yield trails peers, and more cautious potential investors may demand further evidence of a recovery in profits.

Positives: 

  • Easing cost pressures 
  • Net cash held 

Negatives

  • Expected dividend reduction
  • Uncertain economic outlook

The average rating of stock market analysts:

Buy

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