Why Bellway shares just hit their highest since March 2020

After breaking out of a downtrend, City experts believe Bellway has more upside potential.

Optimism appears to be holding firm in the housebuilding sector after Bellway (LSE:BWY) followed last month's £62 million dividend outlay by revealing a record land buying spree.

The latest encouraging update on market conditions at the start of 2021 saw FTSE 250 index-listed Bellway upgrade its target for completions to around 9,800 homes in the year to 31 July. That was accompanied by a 200 basis point improvement in its operating margin.

The sustained recovery in fortunes helped Bellway shares climb another 3% to their highest level since March 2020 at 3,150p. However, the company warned its robust forward sales position is exposed to risks such as rising unemployment, or the end of the stamp duty holiday and changes to Help to Buy rules. That could make it harder for some buyers to raise deposits.

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The group, which reported a much stronger balance sheet with net cash of £346 million, has taken advantage of attractive buying opportunities by spending £452.8 million on contracts to acquire 8,848 plots across 54 sites in the half-year, up from 7,005 plots a year earlier.

The sites acquired are geographically spread and will enable Bellway to reduce reliance on Help to Buy. It added: “This responsible, but front-footed investment strategy, will contribute to the recovery in both volume and operating margin in the years ahead.”

Bellway also pledged in December to increase future dividend payments in line with the recovery in earnings, having resumed dividends with a full-year award of 50p a share.

This payment of £61.7 million made to shareholders on 8 January came in at half the level seen in 2019, but with analysts confident of a further increase the forward yield at well above 3% is not insignificant in the current low interest rate environment.

In the wake of today's update, Numis Securities analyst Chris Millington said the group's growth prospects, upgrade potential and balance sheet strength were not reflected in a current price/earnings multiple of 8.8 times. The dividend is also 2.5 times covered.

Millington has a price target of 3,852p, having increased the broker's 2021 profits forecast by 15% to £472 million and noting that risks are to the upside if more lockdowns are avoided.

He added: “Bellway appears to be approaching the post-lockdown period in a similar vein to the post financial crisis period — using the strong balance sheet to invest in land to support future growth and returns.”

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Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) are also on a number of City ‘buy’ lists after their recent trading updates eased jitters about the industry's near-term outlook. Barratt Developments (LSE:BDEV) is also 95% forward sold for the financial year to June and revealed last week that 11,588 homes were for completion after the end of the Chancellor's stamp duty holiday.

The momentum is also reflected in the performance of construction supplies business Brickability (LSE:BRCK), whose AIM-traded shares jumped 3.5p to 70p today after it upgraded its underlying earnings estimate for the year to 31 March to £16 million.

It said market fundamentals were strong, with the lockdown measures since November having little impact on trading.

The group added: “Order books reflect the underlying optimism that, given the need for more homes to be built and Government support for house building, demand will remain strong for quality building materials.”