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Bellway turns up the volume

The housebuilder believes annual completions can hit 18,000 later in the decade
October 19, 2021
  • Post-tax return on equity climbs to 12.4 per cent
  • Housebuilder sets two-year £1.25bn profit target  

“Will housebuilding volumes in England recover to pre-pandemic levels?” asks Savills in a research note published this month. With interest rates set to rise and various sources of state support unwinding, it’s a question many investors in the sector will have pondered, too.

The estate agent’s best guess is that pre-Covid completion volumes won’t return until 2026, when build to rent, shared ownership and First Homes schemes finally fill the gaps left by Help to Buy. Even then, Savills estimates the industry will fall a fifth short of the government’s commitment to build 300,000 new homes a year.

Against these tempered projections, Bellway (BWY) looks like an outlier. Alongside well-trailed preliminary numbers, the housebuilder set out a volume-led strategy to grab an ever-larger piece of Savills’ slow-rising pie. This year, management plans to improve upon the 10,138 homes completed in the 12 months to July by 10 per cent, and believes output of 12,200 in FY2023 is achievable.

Armed with a land bank that has swelled 26 per cent in two years to 86,571 plots, the group now sees “substantial capacity” to increase home completions to as many as 18,000 per annum later in the decade.

The rub for investors is whether greater volume will spark a sharper increase in operating profits. A 4 per cent expected dip in the average selling price for the coming year, set against ongoing cost inflation, doesn’t feel like the strongest starting point. Analysts at Jefferies described a “normalised” operating margin target of 18 to 19 per cent, before inflation, as “reassuring [but] unlikely to excite”.

Indeed, long-term shareholders may still view the company as recovering: last year’s 12.4 per cent post-tax return on equity, while commendable given winter lockdowns, is a big drop from the 19.8 per cent recorded in 2019. In 2017, it was 22.6 per cent.

Still, a new target for cumulative underlying pre-tax profits of £1.25bn over the next two financial years came in 4 per cent above consensus and will allay some nerves. Given Bellway has set aside £124m for remedial fire safety costs in the past two years, expect a lower statutory equivalent.

Consensus forecasts are for earnings of 371p per share this year, and 400p for the 12 months to July 2023. At the current price, the shares also trade in line with the consensus forecast book value for July 2024, suggesting analysts anticipate shareholder equity can rise at the same time as dividends.

As we have previously argued, this lowly rating leaves room for missteps, some unexpected headwinds, and solid returns. Buy.

Last IC View: Buy, 3,422p, 24 Mar 2021

BELLWAY (BWY)   
ORD PRICE:3,442pMARKET VALUE:£4.2bn
TOUCH:3,435-3,443p12-MONTH HIGH:3,756pLOW: 2,245p
DIVIDEND YIELD:3.4%PE RATIO:11
NET ASSET VALUE:2,664pNET CASH:£330m
Year to 30 JulTurnover (£bn)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20172.56561371122
20182.96641423143
20193.21663438150
20202.2323715750
20213.12479317117.5
% change+40+102+102+135
Ex-div:02 Dec   
Payment:12 Jan