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Bellway looks to offset Help-to-Buy risk

Despite a return to the dividend list, shares in the housebuilder dropped on the publication of full-year numbers
October 20, 2020
  • Possible changes to government support for first-time house-buyers are cited as a risk
  • Since the March lockdown, 57 per cent of reservations were made with Help-to-Buy support
IC TIP: Hold at 2,577p

A return to the dividend list and bullish comments around productivity improvements added some gloss to full-year numbers for Bellway (BWY), though re-establishment of the shares’ income credentials wasn’t enough to shake off market fears of a difficult year ahead for the housebuilder.

Investors knocked 4 per cent off the value of the FTSE 250 group on the publication of these results. On a backward view, a predictably dismal period for sales and cash generation meant the chief financial metrics were negative. Revenues contracted in line with housing completions, while exceptional costs of £72.6m and a 15 per cent rise in work-in-progress to £1.5bn – the product of a stalled sales process only now slowly unwinding – led to the near-total erasure of a £201m net cash position in just 12 months.

Recent trading has been more positive. At £1.87bn, the forward order book is up 42 per cent in a year and at a fresh record, productivity levels are said to be currently between 85 and 90 per cent of those achieved in the year to July 2019, and – in a trend reflected across a surprisingly buoyant summer and autumn housing market – overall reservations are up 31 per cent since the start of August.

However, just how long that strong demand can be propped up will depend on myriad factors, from the avoidance of fresh lockdowns, to the final chapter in the Brexit negotiation saga and the efficacy of the Job Support Scheme – which comes into effect when the UK’s Coronavirus Job Retention Scheme ends next week. The tone of chief executive Jason Honeyman’s outlook read more concerned than confident.

In the face of a contraction in higher loan-to-value mortgages from the high-street banks, Bellway also snuck in some thinly-veiled lobbying of the government, arguing for it to continue with both the current stamp duty holiday on property values below £500,000 and – quelle surprise – the Help to Buy shared equity scheme.

“A continuation of these schemes not only encourages home ownership, helping the housing sector to boost output, but also creates employment and aids the wider economic recovery,” argued chairman Paul Hampden Smith. As detailed by the National Audit Office, Help to Buy has helped push up prices paid for newly built homes far above increases seen for existing properties, to the huge benefit of the housebuilding sector.

Mindful that next year’s policy changes may be less favourable, Bellway has spent the past year buying up land plots from a “wide geographical spread” and – with an average expected selling price under £280,000 – at a lower price point than the FY2019 average. Management hopes this should ensure what it deems an affordable product for prospective homebuyers in the coming years, while reducing the reliance on Help-to-Buy.

Quite how heavily the group has indirectly depended on taxpayer support in recent months was revealed in two details in its preliminary results. First, as reservations fell below 150 a week between the imposition of national lockdown on 23 March and the end of the period, some 57 per cent of buyers used the scheme. In 2019, when reservations averaged 210 a week, this was just 35 per cent.

Second, while more than a quarter of new homes were sold to first-time buyers, 77 per cent accessed the scheme. With credit availability starting to tighten, it is unclear how badly Bellway’s sales pipeline might be hit if this support were withdrawn.

A year ago, we asked whether flat sales prices, cost pressures and Brexit uncertainty might cap operational gearing and mean that the group’s then-record year would prove a peak. That call was apposite – though not for reasons we foresaw – but there’s still reason to expect Bellway’s underlying profitability will be well-supported for the foreseeable future. The strength of the balance sheet has also proved its worth.  

Quite how much the risks to current sales momentum will impact profits is unclear – though we suspect assumed sales prices may need to modify in the coming year if consensus bank forecasts are anywhere near accurate. A recent government request for those same lenders to turbo-charge high loan-to-value mortgage lending and revolutionise home ownership among young people might provide the answer shareholders are looking for. But it may still take time before a new normal for margins is reached. Hold.

FactSet-compiled consensus forecasts are for earnings of 259p per share for the year to July 2021, rising to 306p in FY2022.

Last IC View: Hold, 2,011p, 25 Mar 2020

BELLWAY (BWY)   
ORD PRICE:2,577pMARKET VALUE:£3.18bn
TOUCH:2,574-2,583p12-MONTH HIGH:4,336pLOW: 1,736p
DIVIDEND YIELD:1.9%PE RATIO:16
NET ASSET VALUE:2,427pNET CASH:£1.4m
Year to 30 JulTurnover (£bn)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20162.24498329108
20172.56561371122
20182.96641423143
2019*3.21663438150
2020*2.2323715750
% change-31-64-64-67
Ex-div:26 Nov   
Payment:08 Jan