Company Reports

No-moat Bellway updated the market on its second-half fiscal 2024 performance, which benefited from the progressive improvement in UK housing market conditions observed in the six months to July 2024. Bellway’s private home sales rate rose to 0.58 in the second half of fiscal 2024, a 12% sequential improvement on the first half by our estimates, after taking typical half-on-half seasonality into account. The second-half uptick in homebuyer demand on Bellway’s development sites accords with its major UK homebuilder peers in the first six months of 2024.

Bellway is the fourth-largest residential property developer in the UK market by revenue and annual home completions, and operates under a vertically integrated business model typical of the UK industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the UK’s Home Builders Federation since 2017.

We reiterate the still-significant stock price upside potential for the majority of our UK homebuilder coverage despite the positive homebuilder stock price reaction to a Labour Party victory in the UK general election. Indeed, the election result was widely anticipated given polling in the lead up to the UK general election, which predicted a landslide Labour victory. Nonetheless, the election outcome has emboldened investors, with UK homebuilder stocks leading gains in UK stocks in early trading following the election result on July 5, 2024. Ostensibly, the Labour victory has instilled greater investor confidence that the present urban planning bottlenecks to new housing supply will be appropriately addressed—a key near-term concern that has weighed on UK homebuilder stock prices. Labour’s plans to reinstate support for first homebuyers and to increase supply of other forms of affordable housing are also constructive to the homebuilder industry outlook.

Bellway is the fourth-largest residential property developer in the UK market by revenue and annual home completions, and operates under a vertically integrated business model typical of the UK industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the UK’s Home Builders Federation since 2017.

Homebuyer demand was little changed for Bellway in spring as outlined in the no-moat homebuilder’s June 2024 trading update. Bellway’s weekly private home sales rate of 0.62 home sales per active outlet—covering the four months to June 2024—exhibited relative stability and was broadly consistent with sales activity it reported in early 2024. Still, homebuyer appetite has improved relative to the depths of the housing market downturn in 2023 with Bellway’s spring private sales rate some 7% higher than a year earlier. Bellway shares remain appealing and trade at a 25% discount to our unchanged GBX 3,750 fair value estimate.

Bellway’s first-half fiscal 2024 result provided us with little surprise. Bellway confirmed the delivery of 4,092 homes and EBIT of GBP 139.9 million in the first half, as announced by the no-moat homebuilder in early February 2024. Bellway remains on track to deliver against its guidance for 7,500 home completions in fiscal 2024. Consequently, our fiscal 2024 estimates and our GBX 3,750 fair value estimate are unchanged. Encouragingly, Bellway reported further improvement in the recent sales activity, with the homebuilder’s weekly private reservation rate rising to 0.67 per active sales outlet in the six weeks since Feb. 1, up from 0.56 in the prior corresponding period and 0.59 in January 2024.

Bellway’s February 2024 trading update evidences an incremental improvement in U.K. housing market conditions and points to an inflection point in the housing cycle that is drawing closer. Bellway delivered 4,092 homes and revenue of GBP 1.25 billion in the first half of fiscal 2024, with the no-moat homebuilder remaining on track to deliver 7,500 home completions in fiscal 2024, according broadly with our full-year forecasts. With our long-term expectations unchanged, we make no change to our GBX 3,750 fair value estimate, viewing Bellway’s shares as attractive at their current price. We anticipate further details when Bellway reports its first-half fiscal 2024 result in full on March 26.

Bellway is the fourth-largest residential property developer in the U.K. market by revenue and annual home completions, and operates under a vertically integrated business model typical of the U.K. industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the U.K.’s Home Builders Federation since 2017.

Bellway’s full-year fiscal 2023 result provided us with little surprise with the delivery of 10,945 home completions and GBP 533 million in adjusted profit before tax, aligning with our fiscal 2023 financial estimates. Bellway also weighed in on the near-term outlook, confirming what we’d already expected—that fiscal 2024 will be a tough year for the no-moat homebuilder amid presently glum housing U.K. market conditions. We expect to lower our fiscal 2024 estimates based on build cost inflation and corporate overhead guidance provided by Bellway that exceeds our current forecasts. Still, with our long-term expectations unchanged, we do not expect any impact on our GBX 3,750 fair value estimate.

Bellway is the fourth-largest residential property developer in the U.K. market by revenue and annual home completions, and operates under a vertically integrated business model typical of the U.K. industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the U.K.’s Home Builders Federation since 2017.

As we’d expected, no-moat Bellway’s performance in recent months has reflected the cyclical challenges facing the U.K. homebuilding industry that include mortgage interest rate volatility and cost of living pressure. It is not all bad news for the housebuilder. Build cost inflation has fallen from high-single-digit levels reported in early 2023 and product availability has increased—two short-term tailwinds in line with our estimates.

Bellway’s June trading update provided investors with little in the way of freshly disappointing news or a downgraded near-term outlook. As we’d expected, the no-moat homebuilder’s performance in recent months has reflected the cyclical challenges facing the U.K. homebuilding industry, which include shaky homebuyer confidence, pressured house prices amid the recent rise in mortgage interest rates, and heady build cost inflation that is yet to retrace to a more normalised level. Predictably, Bellway made no change to its fiscal 2023 guidance, given that it was already 95% forward sold for the fiscal year as of late March. Our fiscal 2023 estimates are also largely unchanged; we continue to expect EBIT of GBP 538 million and EPS of GBP 3.21.

The U.K. homebuilders continue to screen attractively despite a fresh look at a number of our key U.K. housing market assumptions and consequent revisions to our financial estimates for most of our U.K. homebuilder coverage. Undoubtedly, U.K. homebuilders are staring down a difficult 2023 where profit margins are coming under considerable pressure from a combination of soaring build cost inflation and the effects of a housing market, which has entered a period of cyclical decline—causing home completion volumes to sharply contract and placing pressure on house prices.

Bellway is the fourth-largest residential property developer in the U.K. market by revenue and annual home completions, and operates under a vertically integrated business model typical of the U.K. industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the U.K.’s Home Builders Federation since 2017.

Bellway is the fourth-largest residential property developer in the U.K. market by revenue and annual home completions, and operates under a vertically integrated business model typical of the U.K. industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway invested in its land bank at an unprecedented level over the fiscal 2021 - fiscal 2022 period. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the U.K.’s Home Builders Federation since 2017.

No-moat Bellway's first half fiscal 2023 result provided us with little in the way of surprises, having been effectively signaled in its recent profit warning trading update in early February 2023. Bellway delivered 5,695 homes in the first half, a flat year-on-year outcome. The average selling price, or ASP, rose 1.6% and reflected buoyant housing market conditions that prevailed into late 2022. In turn, ASP growth helped to partly offset searing build cost inflation during the period. Still, operating margin eased 110 basis points year-on-year to 18.7%.

Ahead of its fiscal 2023 half-year result, Bellway updated the market in respect of a number of its key half-year performance metrics. The update provided us with little surprise with the no-moat U.K. homebuilder delivering 5,695 home completions in the first half of fiscal 2023, a flat year-on-year outcome. The group’s average selling price, or ASP, rose a modest 1.6% as sales mix shifted toward lower-priced affordable home completions, partially offsetting the positive influence that year-on-year U.K. house price gains had on the ASP. While our long-term expectations for the no-moat stock remain unchanged, a time value of money adjustment leads us to raise our fair value estimate by about 2% to GBX 3,750.

Bellway is the fourth-largest residential property developer in the U.K. market by revenue and annual home completions, and operates under a vertically integrated business model typical of the U.K. industry. Volume growth and consequent market share gains are the group’s current focus in creating value for shareholders. To support this growth, Bellway is invested in its land bank at an unprecedented level in fiscal 2021 with elevated levels of investment continuing into fiscal 2022. Build quality is a strategic focus for the group, evidenced by the consistent award of a 5-star House Builder Rating from the U.K.’s Home Builders Federation since 2017.

We lower our fair value estimates for our U.K. homebuilder coverage in the range of 5%-6% with the U.K. government abandoning its prior plan to introduce a range of unfunded and controversial tax cuts. Consequently, the U.K. corporate tax rate is now set to increase as originally planned to 25% in April 2023, up from a current 19%. Therefore, we increase our long-term effective tax rate assumption for our U.K. homebuilder coverage by 6 percentage points to 29%, inclusive of the 4% residential property developer tax, which came into effect in April 2022. Our revised fair value estimates for no-moat Barratt Developments, no-moat Taylor Wimpey, no-moat Persimmon, and no-moat Berkeley Group are GBX 710, GBX 180, GBX 2,400, and GBX 4,700, respectively. We make no change to no-moat Bellway’s fair value estimate of GBX 3,670, having previously incorporated the increase in its effective tax rate into our financial estimates in conjunction with its fiscal 2022 full-year result on Oct. 18, 2022.

No-moat Bellway’s full-year fiscal 2022 operating profit of GBP 653 million—a 23% year-on-year improvement—offered little surprise, with the result preannounced in mid-October 2022. The company delivered a 10.5% year-on-year improvement in home completions in the period, picking up market share in the process alongside strong execution against long-term volume growth ambitions. However, given the recent tightening of U.K. financial conditions, Bellway now expects to deliver flat home completion volumes in fiscal 2023, backing away from its prior guidance for 10% growth. We’ve lowered our fair value estimate by 2% to GBX 3,670 to account for the U.K. government’s recent recommitment to raising the corporate rate to 25% in 2023. Still, Bellway shares trade at an attractive 51% discount to our revised fair value estimate. While the downbeat housing market outlook poses a near-term headwind, Bellway remains our top pick of the U.K. homebuilders we cover.