Bellway profit tops £662m, but margin slip hits shares

Shares of Newcastle-based house building giant Bellway fell about 7% on Tuesday despite the firm reporting its revenue rose 8.3% to £3.2 billion and profit before tax rose 3.4% to £662.6 million in the year to July 31.

Bellway shares had hit an 18-month high at the end of last week amid market excitement about a potential Brexit deal.

Bellway reported a record number of housing completions at 10,892 homes — up 5.7% on last year.

Proposed total dividend will rise 5.2% to 150.4p per share.

Bellway’s major shareholders include Standard Life Aberdeen with 7.71%, BlackRock with 5%, and Dimensional Fund Advisors LP with 4.99%.

However, Bellway’s operating margin slipped to 21% from 22.1% and the firm warned the uncertainty surrounding Brexit “could pose a threat to consumer confidence.”

Bellway said its average selling price increased by 2.5% to £291,968 — and said it should achieve an average selling price in the year ahead in excess of £285,000.

Analysts at Peel Hunt wrote: “Bellway delivered a 3% increase in PBT with growth in volumes and ASP partly offset by a c110bps decline in the margin.

“While trading in the new financial year has been positive and new divisions should provide a tailwind to volumes in FY20, a further moderation in the margin leads us to reduce our PBT forecasts by 5-6%.

“We have rolled our target price forward to 3,550p but after a c40% rise in the share price year to date, and reflecting our forecast trim, we move our recommendation to Hold from Add.”

Robin Hardy, an analyst at Shore Capital, said: “Bellway has been warning for some time that without the higher rates of house price inflation the housing market has enjoyed, house builders’ margins cannot help but go down …

“Unless house price inflation is able to returns to the 4-5% level (last reported rate was only 0.2%) we cannot help but see all house builders being caught in this track.”

In its “current trading and outlook” statement, Bellway said: “In addition to delivering volume growth of 5.7%, the group ended the financial year with a sizeable forward order book of 4,878 homes (2018 – 4,841), with a value of £1,223.9 million (2018 – £1,301.1 million). 

“In the first nine weeks of the new financial year, trading has remained robust, with the group achieving 183 reservations per week (1 August to 30 September 2018 – 176), an increase of 4.0%. 

“As a result of this positive start, the order book at 29 September 2019 remained strong and comprised 5,190 homes (30 September 2018 – 5,380 homes) with a value of £1,311.6 million (30 September 2018 – £1,469.5 million). 

“The slight reduction is a result of the higher number of completions recorded in this short trading period, a reflection of good on-site construction progress. 

“The board is mindful that the uncertainty surrounding ‘Brexit’ could pose a threat to consumer confidence. 

“Assuming market conditions remain favourable, the strong order book, together with additional, considered investment in land and work in progress, should enable Bellway to deliver further, yet more moderate volume growth in the year ahead.

“Also in the new financial year, the one-off benefit to the operating margin from Nine Elms will not be repeated and in addition, in the absence of house price inflation, industrywide build cost pressures will continue to have a moderating effect. 

“As a result of these combined influences, the reduction to a consistent, underlying operating margin will be more pronounced.

“Beyond this new financial year, with a consistent operating margin, the board continues to see further opportunities for both volume and earnings growth. 

“Specifically, following the growth potential afforded by investment in the additional new divisions of Eastern Counties and London Partnerships, the group has capacity to increase output to 13,000 homes per annum. 

“Over the medium term there is opportunity to expand beyond this, with further new divisions. 

“This, together with the group’s strong financial position, ensures our strategy for growth will deliver further sustainable value for shareholders.”

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Mark McSherry
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