Shares of Newcastle-based house building giant Bellway fell about 3% on Tuesday after it published a trading update for the period from February 1 to June 4, 2023, showing its reservation rate was 24.9% lower than the equivalent period in 2022 at an average of 190 per week, down from 253.
Bellway said its forward order book fell to £1.71 billion from £2.4 billion a year earlier — which comprises 6,172 homes, down from 8,152 homes.
The Newcastle firm said the £100 million share buyback it launched on March 28, 2023, is progressing well, with 1.87 million shares purchased at a cost of £44 million during the period.
Bellway said: “In line with previous guidance, the group is on track to deliver full year volume output of around 11,000 homes (31 July 2022 – 11,198 homes) and the overall average selling price is expected to be around £300,000 (31 July 2022 – £314,399).”
On current trading, Bellway said: “The recent expiry of Help-to-Buy in England has led to lower year-on-year demand from first time buyers, and there remains a relative lack of affordably priced higher loan-to-value mortgage products.
“Since 1 February, the overall reservation rate was 24.9% lower than the equivalent period in 2022 at an average of 190 per week (2022 – 253), with the group’s ongoing programme of accelerating the construction of social homes partially offsetting softer private demand.
“The average private weekly reservation rate reduced by 29.8% to 139 (2022 – 198) and was achieved from an average of 239 outlets (2022 – 240).
“Help-to-Buy, which is still available to customers in Wales, was used for only 1% of reservations in the period (2022 – 16%), and although overall sales rates are lower than the comparative period, the cancellation rate remained modest at 15% (2022 – 12%), reflecting good underlying customer confidence.
“The lower reservation rate in the period has driven a reduction in the value of the forward order book, however, it remains sizeable with a value of £1,710 million (2022 – £2,404 million) and comprises 6,172 homes (2022 – 8,152 homes).
“Given the profile of completions in the coming months and prevailing reservation rates, a further decrease in the order book is likely by 31 July 2023 and, as previously guided, volume output is expected to moderate in the next financial year.”
In its outlook, Bellway said: “Overall reservations in the period have been lower than the prior year, however, we have been encouraged by the levels of customer interest and the seasonal uplift in demand.
“As a result, and in line with previous guidance, the group is on track to deliver full year volume output of around 11,000 homes (31 July 2022 – 11,198 homes) with an overall average selling price of around £300,000 (31 July 2022 – £314,399).
“In financial year 2024, given our reduced order book, lower prevailing reservation rates and the uncertain interest rate environment, we continue to expect a lower year-on-year volume output.
“Beyond the near-term, the board is confident that, given the strength of the group’s land bank and balance sheet, Bellway is very well-placed to deliver longer-term volume growth which will further support ongoing value creation for shareholders.”
Bellway CEO Jason Honeyman said: “Bellway has delivered an encouraging trading performance, buoyed by a seasonal uplift through the spring, and the group is on track to deliver full year volume output of around 11,000 homes.
“While customer interest is currently healthy, the board remains mindful that cost of living pressures and the uncertain path of future interest rates could impact housing demand.
“Notwithstanding this, Bellway’s experienced teams, strong balance sheet and high quality land bank, position the group well to successfully navigate changing market conditions and continue to play an important role in increasing housing supply in the years ahead.”
REACTION:
Richard Hunter, Head of Markets at Interactive Investor: “Notwithstanding the broader issues facing the sector, Bellway continues to plot a careful course with particular focus on the areas within its control.
“The group remains on solid ground in terms of its balance sheet, with a net cash position and a selective land acquisition policy. With a healthy land bank already in the background, Bellway can afford to be more choosy in those plots which it considers will have the necessary rate of return, while it has also been refining its financial discipline and its relationship with supply chain partners.
“The latest quarter has seen a sustained improvement in sales demand, particularly compared to the previous quarter and largely to be expected as an increase in the traditional seasonal interest kicks in. However, while the quarter on quarter picture is rosy, the year on year comparison shows the scale of the sector challenges, with overall reservation rates dropping by 25%. By way of mitigation, the group has introduced targeted incentives in certain parts of the country in a bid to boost demand.
“Even so, the demand comparison lays the challenges bare. House prices have shown some signs of weakness (the average selling price for Bellway has dipped to £300,000 from a previous £314,000) and of late mortgage availability has lessened with some lenders withdrawing new deals. At the same time, mortgage affordability is also becoming more of an issue, particularly to first-time buyers, with the expiry of the Help to Buy scheme adding to a general malaise for the spending power of the UK consumer. Further expected interest rate rises in the UK are likely to exacerbate the situation although Bellway does make the point that affordability remains less of an issue for some potential buyers given ongoing wage rises across the economy.
“Build cost inflation has been another issue and has been reported at between 8% and 10% by most of the players within the industry. More positively, Bellway expects the issue to ease over the remainder of the year, as lower demand for construction materials has resulted in better product availability, while more general inflationary factors are also showing some tentative signs of tailing off.
“In terms of legacy problems as evidenced by the various cladding issues for example, Bellway is another housebuilder which has been forced to make reparations. The group has previously announced and is maintaining a provision of £570 million for what it describes as the remediation of legacy apartment blocks, which of course has been an unwelcome (but necessary) drain on capital.
“Elsewhere, the group has also highlighted a robust forward order book of £1.7 billion, although down from a previous £2.4 billion, with pricing remaining firm across most of its markets. Net cash is expected to rise to £200 million by the year end and, in the meantime, the company continues with a shareholder return policy with the previously announced £100 million share buyback programme ongoing, and with a heady dividend yield of 6.3% providing some comfort to investors who have experienced share price turbulence over recent times.
“In all, Bellway is navigating a difficult set of challenges with some aplomb, backed by a previously acquired land bank which gives it the luxury of more selective buying activity for future plots. At the same time, its financial position remains robust and it notes but of course cannot control the wider problems which are facing the sector and indeed the economy as a whole. Despite a share price increase of 18% over the last six months, the shares have dipped by 1% over the last year, as compared to a marginal gain of 0.2% for the wider FTSE250. Challenges aside, it is traditionally not difficult to find supporters of the longer term prospects for UK housebuilders, and the market consensus of the shares as a strong buy indicates that many believe Bellway is a strong growth prospect for the years to come.”