“Reservation rates are down sharply, the order book is also down sharply, prices are no longer going up and completions are expected to go down in the coming year, but shares in Bellway are holding firm despite the gloomy outlook statement that accompanies the housebuilder’s latest trading update,” says AJ Bell investment director Russ Mould. “Analysts are cutting their profit forecasts for the fiscal year to June 2024 and still the shares do not seem to care, so perhaps markets are already pricing in a lot of the bad news.
“After all, Bellway’s shares have almost halved from their pre-pandemic peaks of early 2020 and the difficulties discussed by chief executive Jason Honeyman have not just developed. Inflation, in the form of wage and raw material costs, began to move higher in spring 2021. The Bank of England started to raise interest rates in December 2021. Trussonomics blew up the mortgage, pension and government bond markets in autumn 2022.
Source: Refinitiv data
“All of these factors are in the past and well known, so their ability to shock is limited, especially as Bellway’s shares are way down from their highs. What matters now is what develops from here.
“Analysts are already forecasting a 45% drop in earnings for Bellway in the year to June 2024, thanks to a sharp drop in completions, higher costs, lower prices and a shift in mix to affordable housing. For there to be any further negative surprises that could hit the shares hard, interest rates will have to go higher for longer than thought, or inflation prove stickier than thought. Both are possible. But, equally, if the Bank of England starts to fear a recession more than inflation and talks of a peak in interest rates and even reductions in the headline rate of borrowing emerge then housebuilding stocks could be off to the races.
|
|
2024E |
2024E |
|
|
Change in EPS (%) |
Change in DPS (%) |
|
Barratt Developments |
(47.4%) |
(39.4%) |
|
Bellway |
(45.5%) |
0.0% |
|
Crest Nicholson |
(14.3%) |
(29.4%) |
|
Berkeley Homes |
(6.5%) |
2.8% |
|
Vistry |
(2.2%) |
0.0% |
|
Taylor Wimpey |
11.1% |
0.0% |
|
Persimmon |
12.2% |
3.2% |
|
Redrow |
17.8% |
11.1% |
|
TOTAL |
(16.1%) |
(7.8%) |
Source: Company accounts, Marketscreener, analysts’ consensus forecasts
“Those rate cuts will come at some stage. They always do. It is just a matter of when. The good news here is that Bellway offers some downside protection in the event it takes longer than expected and it does so in two ways.
“First, the shares trade at a 25% discount to book, or net asset value. This effectively prices in further declines in house prices and land values, at least to some degree.
|
|
Historic |
2024E |
2024E |
2024E |
|
|
Price/NAV(x) |
PE (x) |
Dividend yield (%) |
Dividend cover (x) |
|
Crest Nicholson |
0.63 x |
12.1 x |
5.5% |
1.50 x |
|
Vistry |
0.84 x |
9.1 x |
5.7% |
1.93 x |
|
Bellway |
0.75 x |
12.3 x |
6.4% |
1.26 x |
|
Barratt Developments |
0.80 x |
15.4 x |
4.3% |
1.50 x |
|
Redrow |
0.87 x |
9.8 x |
3.8% |
2.65 x |
|
Taylor Wimpey |
0.93 x |
11.9 x |
7.6% |
1.11 x |
|
Persimmon |
1.00 x |
12.3 x |
5.6% |
1.44 x |
|
Berkeley Homes |
1.37 x |
13.0 x |
6.1% |
1.27 x |
|
AVERAGE |
0.92 x |
12.1 x |
5.8% |
1.43 x |
Source: Company accounts, Marketscreener, analysts’ consensus forecasts, Refinitiv data
“Second, Bellway has a net cash pile of some £232 million, according to the year-end trading update.
Source: Company accounts
“That may be down from June 2021’s peak of £330 million but it compares favourably to the £238 million net debt position that Bellway carried in summer 2008, just as the Great Financial Crisis ripped around the world and the UK housing market entered a deep downturn. In addition, Bellway could, if it chose, flex its capital allocation policies and balance cash preservation against dividend payments, share buybacks and buying fresh plots of land, although buying more assets may well be the most important one to maintain over time, as buying land cheaply at the bottom of one cycle is the best possible way of laying the foundations for bumper profits at the top of the next one.”
