Bellway rides out the worst of the slump

Housebuilder Bellway (BWY) had already given a masterclass in how to 'kitchen-sink' the worst of the bad news in a trading update in August, which meant that the figures as presented were no worse than anyone expected, and which gave bargain hunters the cue to rally to the shares. A combination of higher interest rates, the end of Help to Buy and the general state of Britain’s sickly housing market – weekly reservations from private buyers were down 35 per cent – meant that expectations for the results were held firmly in check.

Operationally, most of Bellway’s metrics were in negative territory. For instance, completions were 2 per cent lower at 10,945, with the average selling price dropping by over £4,000 to £310,306. That was reflected in the underlying operating margin of 16 per cent, down two percentage points on 2022, due to residual materials price inflation, lengthened site occupation because of slower reservations and more incentives offered to potential purchasers (all those 'Buy a house, get free carpets' offers). Average selling prices for 2024 are now forecast to be £295,000. There was some positive news in the fact that legacy building safety charges for the year fell considerably and Bellway booked £49.6mn, compared with the £346mn hit it took in 2022.

Management did point to the positive news that social housing completions were higher and now make up 25 per cent of the company’s total completion rate. The problem here is that social housing does not come with the same level of profitability, with negative consequences for the overall margin mix. In the meantime, the proportion of social housing completions is only expected to grow.

The damage limitation exercise has been successful enough to ensure a healthy pick-up in the share price over the past quarter as investors noted Bellway's relative discount in price to net tangible assets when compared with the rest of the (ailing) housebuilders; the sector currently runs at one times price to net tangible assets.

Broker Numis said that its private sales run rate assumed a rate of 0.46 times, compared with the 0.41 times the company achieved over the summer, with some improvement seen in October. So, there is room for an uplift if progress continues. However, investors will be wary of a major dividend cut as the current policy stipulates 2.5 times earnings cover, which it is unlikely to achieve. The balance sheet looks stable, with no obvious need for a major refinancing, but most of what affects the sector is out of its control. Hold.

Last IC View: Hold, 2,032p, 28 Mar 2023