Bellway fails to banish investors’ housing market blues

“The bad news is that Bellway’s completions, revenues, profits and dividend are all down sharply in the first half of its financial year, and the builder is setting aside another £16.8 million to cover cladding remediation costs, but the good news is none of this is really a surprise,” says AJ Bell investment director Russ Mould.

“Boss Jason Honeyman is leaving full-year guidance for housing sales and margins unchanged, too, while he can even point to some improvement in reservation rates, which could lay the foundations for a higher backlog in the second half of fiscal 2024 and therefore increased sales and profits in fiscal 2025.

Source: Company accounts, management guidance for 2024E. Fiscal year to June 2024

“The share price is not showing much interest in any of this, possibly because the headline, near-term valuation metrics of price/earnings and dividend yield do not look especially attractive and perhaps because the outlook for the economy and interest rates in the UK, and therefore Bellway’s earnings and dividends, remains murky.

Source: Company accounts, management guidance for 2024E, Marketscreener, analysts’ consensus forecasts

“But the valuation could be deceptive, as earnings are depressed and the dividend is being cut this year, while Bellway’s stock continues to trade at a small discount to net asset value per share of £28.88p and 28% below the 1.14 times book-value-per-share multiple implied by Barratt’s all-stock offer for fellow FTSE 250 housebuilder Redrow.

Source: Company accounts, LSEG Datastream data, Marketscreener, consensus analysts’ forecasts

“The question then is what may prompt investors to reassess Bellway and drive the stock back above one times book value. Ultimately, higher completions, revenues and profits is the simple answer, and the good news is that the FTSE 250 firm may be nearing the bottom of this profits cycle.

“Completions in the current financial year are expected to return to levels last seen in 2015 and average selling prices are expected to fall back to the levels seen in 2019 and 2020. Lower interest rates and lower mortgage rates would be helpful in stoking demand and Bellway saw an improvement in reservation rates to 105 a week in the first half of the fiscal year to June 2024, compared to 91 in the equivalent six-month period a year ago.

“That is still marginally down on the 109 seen across the whole of the year to June 2023, but in the past six weeks the rate is 163 a week. With Bellway’s planned completions for 2024 being first-half weighted, with 4,092 sales already in the bag and 7,500 expected for the year, further improvement in reservations should help to boost the diminished order backlog book and provide a strong potential base for higher profits in 2025.

Source: Company accounts, management guidance for 2024 full-year operating profit margin. Fiscal year to June 2024

“One possible lead indicator for higher reservation rates and thus the forward order book could be mortgage approvals, a figure which the Bank of England monitors and publishes monthly. January 2024’s figure of just over 55,000 represented a big improvement relative to the post-Trussonomics low of January 2023, and any signs of a sustained drop in interest rates, and an accompanying increase in consumer confidence, would be a further boost here.

“There are few, if any, bigger financial commitments than taking on a mortgage and it therefore makes sense that mortgage approvals and the Major Purchase sub-index of the monthly GfK UK consumer sentiment survey look to track each other pretty closely.”

Source: Bank of England, GfK, LSEG Datastream data