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Bellway still bent on expanding the business

"Bellway has grown volumes for nine years in a row and we expect growth to continue, as does management barring any significant changes to sentiment through 2019," said Liberum Capital Markets
Bellway home
Bellway is looking to achieve cost savings through greater standardisation

Bellway PLC (LON:BWY) is looking to increase the number of houses it builds, though it remains wary of a possible Brexit effect on consumer confidence.

As previously reported, the company built more than 10,000 houses for the first time in a financial year in the 12 months to the end of July, and as at the end of September, the order book had grown to £1.47bn, representing 5,380 homes, from £1.36bn a year earlier (5,034 homes).

READ: Bellway expects record annual earnings but warns on house price growth slowdown

The group said that while there is a risk to consumer confidence posed by the forthcoming exit from the EU, assuming that market conditions remain robust, it has a solid platform from which to further increase output in the year ahead.

In the first nine weeks of the new financial year, trading has remained solid, with the group achieving 176 reservations per week, up 2.9% from 171 reservations per week in the same period of 2017.

Revenue in the financial year just ended rose 15.6% to £2.96bn from £2.56bn the year before.

Profit before tax was up 14.3% at £641.1mln from £560.7mln the year before. The group has set aside a provision of £5.9mln to deal with any likely remedial costs that may be borne by Bellway in the wake of new building regulations introduced in the wake of the Grenfell Tower fire tragedy.

READ: Plan to fit Grenfell Tower with fire-resistant cladding was dropped amid pressure from Tory council to cut costs

Bellway said it has strengthened its processes and training relating to fire safety issues and will continue to develop these in the year ahead “as Government guidance no doubt evolves”.

In total, the owned and controlled land bank rose to 41,077 plots (2017 – 37,855 plots), representing a supply of 4.0 years (2017 – 3.9 years) based on last year's output.

The proposed full-year dividend has been hiked by 17.2% to 143p from 122p the year before. For the foreseeable future, the board expects to maintain a dividend cover of around three times earnings.

John Watson will be retiring as non-executive chairman at the annual general meeting on December 12, to be replaced by Paul Hampden Smith, who is currently the chairman of the audit committee.

Bellway has reported underlying PBT [profit before tax] up 15%, about 1% ahead of consensus,” said Liberum Capital Markets.

“Its new year has started well with reservations up around 3%, a little down year on year on a per-site basis, with trading solid across the country and robust at its price points in London. Bellway has put the building blocks – land, sites and divisions – in place to grow volumes, but management notes the risks that Brexit poses to the key spring selling season,” the broker added.

“Profit growth was driven by 7% volume growth, a 9% rise in prices (mix) and a broadly flat operating margin (22.3% v 22.3%),” Liberum said.

“Management has not given volume growth guidance for 2019, noting that uncertainties around Brexit may impact the key spring selling season in the calendar year 2019. London trading is said to remain robust at its price points (ASP [average selling price] £376k ex Nine Elms),” Liberum noted.

Peel Hunt left its full-year forecasts unchanged and opined that with the shares having fallen 21% this year, they look oversold.

Based on Peel Hunt’s forecasts, the company’s market capitalisation is now just 1.14 times projected net asset value for the calendar year 2019, which is a 20% discount to the sector.

“As dynamics of reducing house price inflation and ongoing build cost pressures continue, the group has a renewed focus on cost control, including the introduction of a standard house type range. While the important spring selling season still lies ahead, the forward order book provides a good platform to meet our forecasts (comprising c7% revenue growth and a 60bps margin decline) and we leave our forecasts unchanged,” the broker said.

Shore Capital said there were no surprises in the results after a very comprehensive trading update on August 8.

Margins slipped by four-tenths of a percentage point – or 40 basis points (bps) – at the gross level and by 20 bps at the underlying earnings (EBIT) level, which was a little worse at the gross level than the broker had been expecting.

“We expect to see margins fall further in the current year and the comments on tightness in the supply chain suggest that this (is) the right assumption,” the broker said.

Return on capital employed (ROCE) also fell, albeit by only 20 bps, although the broker observed: “It has been rare to see a fall in ROCE in this sector”.

“Clearly Bellway still aims to expand its business even in to a less favourable market climate. There are still new divisional offices being added to the network and the board has again highlighted the operational capacity of the business to be 13,000 units per annum (10,307 last year).

Margins are likely to be tighter but we feel that Bellway is more willing than most to accept this and has been warning on the non-sustainability of current margins for at least the last two years,” Shore Capital said.

“We are not expecting a collapse in margins but we do see them fading over the next 2-3 years largely due to the lack of house price inflation, which can no longer cover the inflation in build costs. At this stage we still believe that expansion can just about offset weakening margins and PBT [profit before tax] is likely to be flat to slight[ly] ahead,” it added.

“As with other house builders Bellway has announced a cost reduction plan but the approach of standardising house types and, in effect, lowering specification is not well proven in this industry and savings driven this way have a nasty habit of flowing away. There appears to be no desire to move into investment in its own supply chain via creating off-site manufacturing which is disappointing; however, there is a positive development that we like here – the opening of a Partnerships business in London,” the broker continued.

Shore said its current rating is under review as the share price has fallen below its fair value estimate of 3,050p, while the company has also bowled a bit of a googly by the decision to move into partnerships and by implication the build-to-rent sector.

“We would need to be convinced that Bellway would be willing to expand this non-standard housing side before altering our view, we do feel that there is scope to at least be less cautious, even striking a more positive tone,” the broker said.

Shares in Bellway were up 48p at 2,876p in lunchtime trading.

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