Yahoo Finance This housebuilder is well prepared for tough times ahead so we’ll hold on for a recovery
Broken clocks are right twice a day and this column acknowledges that its preference for asset backing, robust balance sheets and lowly valuations leaves it looking like a damaged timepiece when it comes to several current portfolio preferences.
The housebuilder Bellway is a possible case in point, not least because analysts are not so much pruning as slashing their earnings forecasts for the FTSE 250 company’s new fiscal year, after last week’s publication of results for the 12 months to July 2023. But again the valuation is lowly, there is net cash on the balance sheet and the asset backing is plain to see so, like that broken clock, we shall sit still.
The muted share price reaction to cuts in consensus estimates of profits and dividends of 20pc and more for the year to 2024 also offers some encouragement, although there can be no doubt that patience will be needed for the shares to turn around. Just as expensive stocks can stay expensive for a very long time, cheap stocks can stay cheap if nothing happens to change perception and persuade the market that a business is indeed undervalued.
Such positive catalysts are hard to discern right now. Earnings forecasts are going down as higher interest and mortgage rates take their toll on demand, sales drop, costs go up and selling prices ebb. Sticky inflation is forcing financial markets – and central bankers – to contemplate the prospect that interest rates may stay higher for longer.
Some economists and strategists are talking of a “Table Mountain” shape to the graph of interest rates: flat for an extended period before a rapid fall, a trend that would be unhelpful for mortgage demand and hence housing sales, at least in the near term.
Yet a look at the chart of the Bank of England’s official interest rate back to 1970 shows no such pattern and arguing that “this time is different” can be a quick way to the poorhouse when it comes to financial markets. If the Bank starts to fear a recession more than inflation and talks of a peak in interest rates and even reductions in the headline rate of borrowing, housebuilding stocks could be back on the radar.
Investors must prepare for all eventualities, however, and that is why protection against potential bad news is so important. Bellway has net cash on its balance sheet and is cutting back on land acquisition to husband its resources.
That is one buffer; another is asset backing, since the balance sheet carries £4.6bn in inventory (compared with a market value of £2.4bn).
Finally, we come to valuation, since that same £2.4bn market value represents a 31pc discount to net assets, or shareholders’ funds, of £3.5bn, a gap that prices in further bad news on sales volumes and selling prices. It is going to be bumpy but we will stick with Bellway. Hold.
Questor says: hold
Ticker: BWY
Share price at close: £20.40
Update: Ashmore
Another sliding share price leaves us with another tricky decision when it comes to Ashmore, the specialist emerging markets fund manager, where four months of ownership for this column are already yielding a capital loss of about 29pc.
Again we have an unloved business with net cash on the balance sheet and, in this case, a share price at its lowest level since 2009, so we shall have to tough it out. The management’s decision, released alongside last month’s full-year results, to adjust the terms of the bonus pool payout ratio in favour of staff (and thus to the potential detriment of profits and shareholders) does not sit well and investors could be forgiven for deciding just to walk away under the circumstances.
Last week’s trading update reported further outflows from its funds as Chinese economic weakness, a stronger dollar and broader risk aversion all weighed on emerging markets and Ashmore’s funds offered little sign of sustained outperformance of their benchmarks. None of this is helping the share price, but unloved can mean undervalued.
The 16.9p-a-share dividend looks well backed and we have the net cash pile to provide backing to the valuation.
Also, there are some signs of better times ahead for emerging markets. Fears of higher-for-longer interest rates are worrying bond and stock markets in some developed markets, but Poland, Brazil, Chile, Peru and Paraguay are starting to cut as they reap their reward for having raised rates early and tackled inflation quickly.
This compares favourably with Western central banks’ tardiness and offers hope for emerging market asset prices. Value could yet emerge from Ashmore. Hold.
Questor says: hold
Ticker: ASHM
Share price at close: 167.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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