Bellway bumps up the dividend as orders surge

Some are speculating that the UK housing market could witness a slowdown if the Bank of England continues to ratchet up interest rates. That’s a logical conclusion, but it’s worth remembering that the UK base rate has averaged 7.2 per cent from 1971 through to 2022. Even if the Monetary Policy Committee remains resolutely hawkish over the next 12 months, it’s probable that borrowers will still only have to contend with modest interest rates from a historical perspective.

Bellway (BWY), one of the UK’s five leading housebuilders, didn't seem overly concerned by a prospective increase in borrowing costs, as it detailed an 11.6 per cent increase in underlying half-year operating profit to £332mn, accompanied by a 140 basis point increase in the associated margin to 18.7 per cent. Margin growth has been achieved against an inflationary backdrop, including upward pressure on employee costs.  

Apart from inflationary pressures, the group will have to deal with the fallout from the Grenfell Tower disaster for a while longer. Bellway said it had provided an additional £22.1mn for remedial works, bringing the total spend to £187mn, although the group has clawed back around £30m from suppliers and subcontractors, “where they have fallen short of the standards required”.

The builder’s order book has increased by roughly a quarter since midway through March in 2021, with the underlying value of the homes up by a third to £2.21bn. Management is guiding for a 10 per cent increase in volume growth through the year, with an average selling price of £305,000 – slightly down on the level at July 2021, but in advance of earlier guidance. The land bank has increased by 15 per cent year on ear, which should assist the group in achieving its volume target of around 12,200 homes in FY 2023, an increase of a fifth on July 2021.

Interim details had been foreshadowed in a February trading update, although the group’s shares drifted downwards on results day. Interest rates aside, prospects for housebuilders could be imperilled by a general fall in aggregate demand and investment if price rises persist over a lengthy period, particularly if they translate to job losses into the economy. Bellway shares change hands at six times consensus forecast earnings, so we reiterate our previous position that Bellway’s “lowly rating leaves room for missteps, some unexpected headwinds, and solid returns”, while management maintains that the group “can balance volume growth with higher dividend returns for shareholders”. Buy.

Last IC view: Buy, 3,442p, 19 Oct 2021