Bellway hopeful of recovery as sales pick up

Bellway's (BWY) results contained no surprises. For the six months to 31 January, it slashed dividend payments as sales and earnings slumped due to an interest-rate-driven plummet in housing demand. In this sense, Bellway is much like its peers. However, in other ways, Bellway looks better placed.

For one, the housebuilder pointed to improving sales rates as a sign that the market was recovering as interest rates stabilised amid falling inflation. It said it was "well-positioned to build on its proven track record of organic volume growth from financial year 2025 onwards". 

Yes, the forward order book's value fell to £1.3bn from £1.6bn in the previous year. However, analysts had expected as much, and the order book's value has risen from January's update when it sat at £1bn, which analysts described as encouraging. In addition, the overall reservation rate rose by 7.8 per cent year on year. These positive forward-looking signs are tentative, but it is better than rivals Persimmon (PSN) and Crest Nicholson's (CRST) overall lack of positivity.

However, not everything about Bellway's current position is positive. Investors must consider the competition watchdog's investigation into competition law breaches relating to sharing "commercially sensitive information" to influence prices. It is investigating Bellway as part of this, alongside Barratt Developments (BDEV), Berkeley Group (BKG), Redrow (RDW), Taylor Wimpey (TW.), Vistry (VTY) and Persimmon. Meanwhile, the watchdog is also investigating Barratt Developments and Redrow's merger despite bullish confidence from analysts that it would not.

The much smaller listed housebuilders Crest Nicholson, MJ Gleeson (GLE) and Springfield Properties (SPR) are the only ones not being probed. In other words, while the investigation is negative for Bellway's investment case, the whole sector faces scrutiny.

The question is whether the market has undervalued Bellway. It trades marginally below its net asset value, the bulk of which comprises land for housing that, as its improving sales rate shows, people are increasingly eager to buy. However, on a price-to-forward consensus earnings ratio of 18.6 for the next 12 months, Bellway is the priciest among its peer group, although they all trade between 13 and 19 times. Meanwhile, the housebuilder's net cash position has shrunk, although it does not predict a switch to net debt like Persimmon.

While Bellway's forward sales figures are encouraging, we are unsure if this justifies a higher forward price/earnings ratio than its peers. With so much uncertainty around the whole market, Bellway is in a good place, but it is not good enough for us to up our rating. Hold.

Last IC view: Hold, 2,232p, 18 Oct 2023