Suspicions that the UK housing market may be running out of steam were calmed by another impressive trading update from Bellway (BWY). The share price moved up 4 per cent after the housebuilder revealed that both average prices and completions are expected to rise by 10 per cent in the year to July 2016. As a result, operating margins in the current financial year are forecast to increase to at least a record 21 per cent.
What's new:
■ Operating margins to hit record high
■ Shares still trade at a discount to sector average
■ Labour cost pressures starting to ease
Customer demand has been strong throughout the traditionally quieter summer months. Together with a stronger autumn selling season, that has lifted the average number of weekly reservations by 12 per cent to 165. The group’s most recently opened operating divisions, located in Bristol and Kent, are both attracting strong interest. Average prices in the five months to December rose by 5.8 per cent to £252,100.
Further brownfield sites have been acquired, all meeting or exceeding minimum acquisition criteria on gross margin and return on capital employed. And although the company spent £235m on land and land creditors, net debt has fallen from £162m to £136m, leaving Bellway with just 8 per cent gearing.
Numis Securities says…
Add. Bellway’s trading statement includes a number of performance indicators that are ahead of our earlier forecasts, and we are upgrading our estimates accordingly. We now expect pre-tax profits for the year to July 2016 of £440m and EPS of 287p, with a price target of 2,860p per share. The upgrade is based on the strong reservation performance and average prices ahead of our expectations, thanks to new sites outperforming. Bellway is trading on a price to net tangible assets ratio of 1.5 times, significantly below the 1.9 sector average, while the attractive dividend yield is covered three times by post-tax earnings.
Peel Hunt says…
Hold. Bellway continues to trade well. While labour cost pressures persist, they have eased from earlier in the year, and with labour supplies less volatile management has greater confidence in achieving its output guidance. Bellway has already sold 75 per cent of its targets for the current year. As a result, we have nudged up our full-year forecasts and now expect adjusted pre-tax profits of £440m and EPS of 286.9p. Our forecast dividend of 95p a share equates to a yield of 3.5 per cent. While this is lower than the 4.9 per cent sector average, the shares are trading at a 20 per cent discount to the sector average on a price-to-book basis.
