This housebuilder’s shares are taking a bashing but they can still chime with value seekers

Questor share tip: it may not offer instant performance but as interest rates peak and then fall, history suggests builders will prosper

Russ Mould 14 June 2023 • 6:00am

Another week sees another demolition job on house-building stocks and ushers in another sleepless night for this column as a result, but the Bellway trading update contains no new, nasty surprises, unlike the previous week’s first-half results from Crest Nicholson, and we shall simply have to tough it out.

No wonder Alastair Mundy, one-time manager of Temple Bar Investment Trust, wrote in his book, You Say Tomayto, that value investing sometimes felt like sitting in a restaurant on Valentine’s night on your own.

Bellway’s trading statement for February to early June, the first four months of its second half, showed a decrease in reservation rates and the order book, as well as a modest increase in cancellation rates.

None of this should be a surprise, following last autumn’s chaos in the government bond, pension, mortgage and currency markets amid the nation’s brief experiment with Trussonomics, or indeed March’s half-year results.

More promisingly, the overall reservation rate improved in this four-month period to an average of 190 dwellings a week, compared with 138 in the first half of the year.

In addition, pricing remains generally firm, and the net cash pile continues to grow, despite an ongoing share buyback programme.

For the entire year, Jason Honeyman, the chief executive, and the board expect completions and average selling prices to come in at 11,000 and £300,000 respectively, slightly below where they were in the 12 months to July 2022.

Again, none of that comes as a shock. The shares are still taking a bashing, though, as the statement came out on the same day as the latest wage growth figures from the Office for National Statistics.

They were much stronger than economists had expected, as pay excluding bonuses rose 7.3pc year on year in the three months to April and by 6.5pc including them, and prompted a dash to price in further interest rate increases at each of the Bank of England meetings scheduled for June, August, September, November and December, enough to take the base rate to 5.75pc from 4.50pc.

Higher base rates mean higher bond yields (or deposit rates) and higher funding costs for banks, and that in turn can mean higher mortgage costs for borrowers as lenders look to preserve their margins.

With housing affordability already an issue, higher mortgage costs will further complicate the decision, and the economics that face would-be house buyers.

The Halifax index asserts that the average UK house price is £286,532, or 9.5 times the average annual wage of £33,969, according to the latest Office for National Statistics data, so on the face of it either wages need to go a lot higher, or house prices come down, or we see a combination of the two.

A slower housing market is a logical expectation, but that is why analysts already believe Bellway’s pre-tax profit will fall by 40pc in the year to July 2024 and then barely improve in fiscal 2025.

It is why analysts are pricing in a cut to the dividend in the year to July 2024 and then little or no improvement in fiscal 2025.

In this respect the forward price-earnings ratio of less than seven times and a dividend yield of 6.5pc for the year to July 2023 may both be a bit deceptive, as they may represent a near-term high for both earnings and dividends, but the shares are still cheap on an asset value basis, too.

The market capitalisation of £2.6bn compares to shareholders’ funds of £3.5bn, based on the accounts for the six months to January. Inventories were £4.4bn and the balance sheet net cash, while there were no intangible assets such as goodwill to muddy the waters.

A 25pc discount to net assets prices in a lot of bad news and gives some downside protection, especially as book value could rise as Bellway stays in the black and keeps generating profits.

Despite this week’s reverse, our position in Bellway is also still in the black, at least on paper, because of the lowly price paid, and we have already banked 95p a share in dividends, with another 45p to come on July 3.

This stock is unlikely to offer instant performance, given some of the macroeconomic headwinds it faces, but interest rates will peak and then fall at some stage, and history suggests that building stocks are in their element at such times.

There lies one potential catalyst for performance, while strong nominal wage growth should help housing affordability over time, and we shall just have to wait, it is hopefully protected on the downside by that cash buffer and the lowly valuation.

Questor says: buy

Ticker: BWY

Share price at close: £21.72

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