Bellway has a tough year ahead of it

Housebuilder Bellway (BWY) posted a dip in pre-tax profits in its half-year results even as revenue ticked up 1.6 per cent thanks to the inflationary environment. The company said this was a “strong performance, notwithstanding the challenging operating and trading conditions in the period”.

Said conditions are likely to get worse rather than better in the short to medium term. Many analysts are still forecasting that house prices will have fallen by between 10 and 15 per cent by next year. So far, Nationwide has recorded a house price fall of just 1.1 for the year to February, which gives some indication as to how much further prices have left to drop while interest rates remain heightened.

All of this, in addition to the end of Help to Buy this month, which accounted for 22 per cent of Bellway’s revenue last year, is why the company said its forward order book is down to £1.6bn from £2.21bn this time last year. It noted that forward sales have picked up when compared with the final quarter of last year, but house sales often pick up after Christmas so investors should not see this as a sign of recovery just yet.

Bellway anticipates that it is “well placed to deliver volume output of around 11,000 homes in the current financial year” – the 12 months to 31 July 2023 – compared with 11,198 homes for the previous period. This would only represent a slight decrease, but with houses being sold for less and construction costs higher, analysts’ predictions of a drop in revenue and earnings for this financial year now seem nailed on.

The question for investors is whether all of this bad news has already been priced into the valuation. It is currently trading at a sizeable discount to its book value and at 6.1 times its consensus forecast earnings for the current financial year. That could represent a good entry point for an investor banking on the housing market coming back to life by the end of next year, while recognising the difficulties facing housebuilders right now.

Alternatively, there are better performing housebuilders out there which we see as stronger investment cases, such as Vistry (VTY) – which has benefited from its Countryside merger – and Redrow (RDW) – which sells homes to wealthier buyers who are less affected by higher interest rates and less dependent on Help to Buy. 

While the recovery case for Bellway has merit, we maintain our rating considering the relative strength of its rivals. Hold.

Last IC View: Hold, 1,787p, 18 Oct 2022