Record revenue but Bellway warns demand moderating

Shares have bounced from multi-year lows in the past week, and there are plenty of positives in these annual results, writes our head of markets.

Bellway (LSE:BWY) is putting the building blocks in place to leave it flexible and well prepared for what is likely to be a demanding environment in the shorter term.

Its focus on longer-term planning should enable it to withstand a tougher housing market. For example, the group has increased its land bank in the year ended 31 July by 13% to over 97,000 plots. Not only does this leave the company able to develop land at a pace commensurate with demand, but it also allows Bellway to be much more selective in land acquisition over the coming months.

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At the same time, it has increased its regional presence and deliberately lessened its reliance on London. This local knowledge has been beneficial in identifying new opportunities and, with a strong balance sheet, the financial powder is dry for the moment further acquisitions present themselves.

The effect on most of the key metrics has been resolutely positive, as previously trailed in the full-year trading update in August. Annual revenues grew by 13% to a record level of £3.54 billion, underlying operating and pre-tax profit both jumped by 23%, while the underlying operating margin also rose comfortably to 18.5% from a previous 17%. At the same time, the Return on Capital Employed spiked to 19.4% from 16.9%, while strong forward sales also grew to stand at a value of £2.1 billion.

Such cash generation has also enabled a further increase to the dividend, which now stands on a projected yield of a heady 7.7%. As with other housebuilders, the ability to pay shareholders to wait with an exceptionally attractive dividend income has been put in place partly to offset the wider challenges the sector has faced in terms of share price performance.

Of course, Bellway is no exception to these ongoing challenges. The recent volatility in UK bond markets which has had a detrimental impact on mortgage availability, coupled with an increasingly pressed consumer in a deteriorating economic environment, has not played out well within the sector.

Bellway points to the fact that mortgage availability is showing signs of strengthening following the government’s attempts to stabilise the market by reversing much of its previous spending plans, including some relief on stamp duty.

However, the assistance of the Help to Buy scheme is fading quickly (16% of reservations involved Help to Buy in the period, compared to 30% last year and 40% the year previous), while the increase in social housing plots has reduced Bellway’s average selling price to £300,000 from £314,000 and there has been some moderation of demand as market volatility has reigned.

At the same time, a recessionary and rising interest rate backdrop could well stall progress. Supply chain and inflationary pressures remain, as does the drag on pre-tax profits of a “net legacy building safety expense” totalling £346 million from the previous year’s level of 352 million. The overall figure for these government fire safety rules is around £500 million.

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As with its peers, Bellway's share price has reflected the half-glass empty outlook for prospects as opposed to the robust earnings which are continuing on the ground. For Bellway, this translates to a share price decline of 46% over the last year, as compared to a drop of 24% for the wider FTSE250.

However, the bulls remain undeterred given the group’s strategic flexibility for growth, longer-term planning underpinned by a robust balance sheet, and previous experience of difficult economic periods.

Indeed, the market consensus of the shares as a 'strong buy' is reflective of the support which the company retains from potential investors, even if the share price disconnect is likely to stay in place for the time being.