Yahoo Finance With a well buttressed balance sheet and a hefty land bank, this builder’s foundations are solid
The interim results last week feature no nasty surprises, British mortgage approval figures are no longer slumping, and Bellway is even maintaining its interim dividend, to provide support to consensus forecasts that imply a dividend yield of more than 6pc for the year to July 2023.
Throw in a well-buttressed, net cash balance sheet and a lowly valuation relative to net asset value (NAV) and this column is still inclined to keep faith in the house builder as one way of weathering current financial market squalls and seeking upside once calm returns.
Granted, a drop in the March forward order book of more than a quarter and a plunge in the weekly reservation rate of more than 40pc in the six weeks from Feb 1, when compared with a year ago, do not make an initially positive impression.
Nor do hints at some margin pressure thanks to higher input costs. But February’s trading update had already flagged all three trends and the private reservation rate of 135 dwellings a week in the past six weeks represented a big step up on the average of 91 that prevailed across the first six months of the fiscal year, to the end of January.
The nation’s brief flirtation with Trussonomics badly hit mortgage pricing and availability, but official data have provided tentative signs of a recovery, albeit from low levels.
Data released by the Bank of England last week showed 43,500 mortgage approvals in February, up from 39,600 in January, to provide a glimmer of hope and back up Bellway’s impression of the market.
This is not to say that investors should get carried away.
Mortgage approvals peaked at almost 107,000 a month during the lockdown boom of 2020, average mortgage rates are still rising and the banking wobble in the United States and Switzerland could yet blunt senior loan officers’ appetite for lending.
But the news is no longer getting worse, at least for now, and analysts’ forecasts for Bellway already factor in tougher times.
Excluding the base effect of last year’s £346m charge for cladding remediation, consensus estimates point to a 17pc drop in pre-tax profit in the fiscal year to July 2023. A further one-third drop is expected in the 12 months to July 2024. That would take earnings back to 2015 levels at about £350m before tax.
No one’s crystal ball is good enough to say whether that will be the bottom or not. If it is, paying barely 10 times trough earnings feels like a bit of a bargain.
If it is not, shareholders get protection from a balance sheet that carries £297m in net cash, compared with the (still fairly modest) £238m net debt position with which Bellway entered the financial crisis 15 years ago.
Forecasts of a sharp drop in profits and a reduction in the dividend for fiscal 2024 also mean that expectations are low.
Even after the rally from last autumn’s nadir, the shares trade only 15pc above the Covid panic low of early 2020 and that means they stand at a 22pc discount to the first-half net asset, or book, value per share of £28.19.
The decision by Bellway’s board to leave the interim dividend unchanged and target a full-year payment that matches last year’s 140p a share overall payment speaks of confidence, as does the £100m share buyback.
Even if analysts prove correct in their assessment that the dividend will drop to 95p a share in fiscal 2024, that still equates to a yield of 4.3pc on the current share price and when earnings still cover the payment by more than a factor of two, according to consensus forecasts.
Near-term positive catalysts may well be in short supply, but so are good quality dwellings.
Bellway’s land bank, which contains 31,420 plots with detailed planning permission, 26,600 with pending permission and a further 41,700 within strategic land holdings, means the FTSE 250 constituent is capable of benefiting once the housing market turns up once more, as it always has and always will (the company is targeting 11,000 completions for the fiscal year to July 2023).
Such a hefty land bank also means Bellway can ease off on buying new plots while economic uncertainty prevails. The builder only added 2,428 plots in the first half, a two-thirds drop from the equivalent period a year ago, but that at least boosted cash flow and thus underpinned the welcome dividend yield.
The next trading update, for the third quarter, is due on June 13.
We’ll keep building a position in Bellway.
Questor says: hold
Ticker: BWY
Share price at close: £21.96
Russ Mould is investment director at AJ Bell, the stockbroker
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