ii view: housebuilder Bellway shares optimistic outlook

Third-quarter trading update to 2 June

• Private reservation rate up 6.9% from a year ago to 0.62 per outlet per week
• Forward order book of 5,346 homes, up from 4,411 as of July 2023
• Net debt of £57 million, down from net cash of £42 million

Guidance:

• Continuing to target completions of 7,500 homes, down from 2023’s 10,945 homes
• Now expects an average full year selling price of £305,000, up from previous estimate of £295,000

Chief executive Jason Honeyman said:

"Bellway (LSE:BWY) has delivered a solid trading performance supported by improved affordability and a seasonal uplift through the spring, and we remain on track to deliver full year volume output of around 7,500 homes.

"We reiterate our confidence that the Group's robust balance sheet and operational strength, combined with the depth of our land bank, will enable Bellway to successfully capitalise on future growth opportunities."

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ii round-up:

Bellway (LSE:BWY) today detailed increased customer reservations during its key spring selling season, with the housebuilder expecting a return to profit growth in the financial year ahead if market conditions remain stable. 

Reservations for private or non-social housing improved 6.9% from the same spring selling season last year, with reduced build volumes down 31% year-over-year to 7,500 and required customer incentives still expected to lower profit margins by around 6% for the year to late July.  

Shares in the FTSE 250 builder rose 1% in UK trading having come into this latest news up by around a fifth over the last year. That’s similar to rival Persimmon (LSE:PSN) although behind a two-thirds increase for newly FTSE 100 promoted affordable homebuider Vistry Group (LSE:VTY). The FTSE 250 index is up almost 8%.

Bellway operates through 20 regional divisions across the UK with its brands being Bellway, Bellway London, and Ashberry.

Changes in its product mix are now expected to see the average selling price for the full year come in at £305,000, up from management’s previous estimate of £295,000. 

A forward order book of 5,346 homes as of early June is up from 4,411 as of late July 2023, aided by increase customer affordability following lower mortgage rates and hoped-for interest rate cuts later this year. 

Group net cash of £42 million in July 2023 has now turned to net debt of £57 million as of early June and follows an interim dividend of 16p per share announced in March, down from 45p per share a year ago.  

A full-year trading update to 31 July is scheduled for 9 August. 

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 and Barratt Developments (LSE:BDEV). 

For investors, hoped-for interest rate cuts later this year are not guaranteed, complicated by factors such as a UK general election. An escalation of the conflict in the Middle East could also drive key inflation component oil higher. The company still need to offer buyer incentives which squeezes profit margins, the planning system continues to offer challenges, while the forecast dividend yield is just 1.7%, down from an historic dividend yield of close to 5%.

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On the upside, interest rate cuts might be cut later this year and slight reductions in mortgage rates continue to buoy customer demand and enquiries. The wider housing shortage has left selling prices relatively resilient, a robust landbank continue to enable new site openings, while the previous acquisition of Redrow by Barratt Developments could see other housebuilders following suit.

In all, and while some caution still looks sensible, a consensus analyst estimate of fair value above £30.25 per share should help to underpin longer-term optimism.    

Positives: 

• Hoped-for interest rate cuts
• Easing cost pressures 

Negatives

• Expected dividend reduction
• Uncertain economic outlook

The average rating of stock market analysts:

Buy