ii view: optimism at Bellway despite profit tumble

Full-year results to 31 July

• Revenues down 3.7% to £3.4 billion
• Adjusted pre-tax profit down 18% to £532.6 million
• Final dividend unchanged at 95p per share
• Total dividend for the year unchanged at 140p per share
• Net cash down 5.4% to £232 million

Guidance:

• Targeting completions of around 7,500 homes, down from 2023’s 10,945 homes

Chief executive Jason Honeyman said:

"Bellway has delivered a resilient performance against a backdrop of rising mortgage interest rates and challenging market conditions.

“The depth of our land bank and robust balance sheet provide ongoing strategic flexibility and scope for outlet growth in the year ahead.”

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ii round-up:

Housebuilder Bellway (LSE:BWY) today detailed profits broadly in line with City expectations as it signalled its intention to reduce build completions over the current new financial year, given the backdrop of reduced customer demand. 

Adjusted pre-tax profit for the year to the end of July fell by almost a fifth to £532.6 million, with the prevailing environment of constrained customer mortgage affordability underlying its intention to build 7,500 new homes over the new financial year. That’s down from 10,945 over the year just gone.

Shares in the FTSE 250 company rose around 1% in afternoon UK trading having come into this latest news up by just over a tenth year-to-date. Rivals Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW.) and Redrow (LSE:RDW) are all up by just under a tenth in 2023 so far having all fallen by a double-digit amount last year. 

Bellway operates through 19 regional divisions across the UK with its brands being Bellway, Bellway London, and Ashberry.

Sales for the nine weeks to early October were 133 per week, down from a rate of 191 per week in the same period in 2022. The average selling price for the year ahead is expected to be £295,000, down from £310,306.

Despite current reduced sales rates, management pointed to a shortage of high-quality and energy efficient homes across the UK as underpinning long-term fundamentals for the housebuilding industry. The final dividend is unchanged year-over-year at 95p per share. 

Broker UBS reiterated its ‘buy’ rating on the shares on valuation grounds. The housebuilder’s Annual General Meeting is scheduled for 15 December. 

ii view:

Started in 1946, Bellway is today focused on providing traditional family housing outside of London and apartments within London. Headquartered in Newcastle, its rivals include Vistry Group (LSE:VTY), Persimmon (LSE:PSN) and Crest Nicholson Holdings (LSE:CRST). 

For investors, raised interest rates are making mortgage repayments less affordable for potential customers, reducing demand, while buyer incentives are squeezing profit margins. Build costs despite some easing remain elevated, the planning system has for some time now offered challenges, and government aid in the form of the Help-to-Buy scheme has now expired. Management’s targeted dividend cover of 2.5 times could also see the dividend reduced given profits are expected to fall. 

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On the upside, the wider housing shortage has left selling prices relatively resilient and the company is in a net cash position. A tight hand on costs has included job losses, and a potential future Labour government is suggesting a push towards easier planning and an upping of new build numbers. Shareholder returns also include an ongoing £100 million share buyback programme. 

Housebuilders remain volatile given the state of the mortgage market and falling house prices. Bellway's share price is also significantly below its best, although currently much higher than where they started the year. A sustained recovery, however, will depend on the interest rate cycle and when the market begins to factor in lower borrowing costs. Consensus analyst estimate of fair value is over £26 per share, a price the shares haven't seen for over 18 months.

Positives: 

• Ongoing share buyback programme
• Attractive dividend payment (not guaranteed) 

Negatives

• Elevated costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy