With the housebuilding sector remaining on shaky foundations, Bellway (LON:) has provided some grounds for optimism by managing some of the levers within its control.
In order to maintain cash generation and asset turnover, the group is looking to unlock some of the value from its strategic land bank. This follows the vital Spring selling season which started brightly, but where customer demand waned over recent weeks given rising mortgage rates, as evidenced by a decline of 6.2% in private reservation rates for the period.
This is confirmation of what has been a torrid time for the housebuilding sector and Bellway is no exception. Higher for longer interest rates have joined a list of headwinds, such as consumer sentiment which has been in the doldrums for some time. In addition, there have been increasing calls from the sector for the government to accelerate the proposed relaxation of planning regulations, which is far from taking full effect. There are also general affordability concerns, particularly for first-time buyers, which need to be addressed to give this cyclical sector an overdue boost.
Bellway warned at its half-year numbers in March of an uncertain outlook given the ongoing conflict in the Middle East and there are already signs of upward pressure on building material costs stemming from higher fuel and energy input prices, as well as some surcharges appearing within its supply chain. A less predictable domestic political environment is an additionally unwelcome development, leading to the group turning inwards to maintain progress with a sharp focus on costs and the monetisation of its strategic land bank, which currently stands at around 47000 plots.
At the same time, Bellway has contracted to purchase a further 6744 plots at a cost of £363 million, with its acquisition policy remaining highly selective and in those areas where underlying demand is most in evidence. This has in part increased net debt to £236 million from a previous £72 million, although it remains well within the group’s margin of comfort. There is additional solace to be sought from a forward order book which contains 5345 homes with a combined value of £1.57 billion.
The careful financial management of its assets leaves Bellway in decent shape. This has enabled the continuation of a £150 million share buyback programme, while a hike to the dividend in March leads to a reasonably punchy yield of 4.1% which is adequately covered, even if the level of the dividend remains below historic levels given a severe cut to the payment two years ago from 140p to 54p.
As such, the group has maintained its outlook of full year underlying operating profit to be between £320 and £330 million (up from £303.5 million the previous year), with completions expected to fall in a range of 9300 and 9500 homes (8749). The group previously reduced estimates for operating margin, downgrading from 11% to 10.5% due to a combination of sales incentives and building cost inflation, and this remains unchanged.
While there might not be a great deal here for the bulls to feed on, it will be recognised that Bellway is adjusting its model to react to challenging circumstances. That being said, and despite its measured progress, the share price tells the story for Bellway. The shares have declined by 34% over the last year, as compared to a gain of 8% for the wider , while the price is 56% lower than its pre-pandemic peak in February 2020, which underlines the scale of the revival needed for the group to regain its former glories. Even so, the company has picked up many admirers along the way and the market consensus of the shares as a buy reflects optimism that there may be brighter times ahead.