Bellway Plc (BWY) is a United Kingdom-headquartered housebuilding company. It is one of the UK’s largest housebuilders, with operations in over 22 divisions. The company offers an extensive choice of property range, extending from one-bedroom apartments to six-bedroom family homes, also providing homes to housing associations for social housing. The company is having an employee base of over 2,000 professionals. The company also offer customers specific properties ranging from single bedroom flat to the luxury penthouse. The company provide homes in England, Wales and Scotland regions.

Key Statistics



Top Shareholders

 

Trading Update (1 February to June 2^nd, 2019)

The company reported robust sales and as a result of the company’s growth strategy, reservation rate for the period surged by 4.7 per cent to 244 per week versus 233 per week for the same period of the last year. The company gained the status of a five-star home builder due to an increased level of customer satisfaction and responsible approach adopted. As a result of disciplined investment in attractive land opportunities, the company got 10,620 plots contracts for the period as compared to 8,942 plots as of 3 June 2018. With the sturdy onward order book, the management expects strong earnings growth in the ongoing financial year. The number of plots increased by 2.7 per cent to 6,312 homes for the period against 6,144 homes for the same period of the last year.

Financial Highlights - H1 Financial Year 2019 (£, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year ending 31^st January 2019, the company completed 5,007 homes in H1 FY2019 (H1 FY 2018 – 4,741 homes), an increase of 5.6 per cent, driven by significant investment in land and work in progress and favourable market conditions. Acquisition of land in areas of high customer demand positively affected the average selling price, which rose by 6.5 per cent to £293,832 in H1 FY2019 versus £275,945 in H1 FY2018. The surge in both completion of the house sale and average selling price drove housing revenue higher by 12.4 per cent to £1,488.0 million in the first half of the FY2019 versus £1,324.4 million in H1 FY2018.

While gross profit rose by 9.6 per cent to £377.5 million in H1 FY2019 from £344.5 million in H1 FY2018. The company’s gross margin moderated by 60 basis points to 25.4 per cent for the period as against 26 per cent in H1 FY2018. The decline in gross margin was due to the diminishing benefit of historical house price inflation. 

Operating profit grew by 8.7 per cent to £319.8 million in the H1 FY2019 against £294.2 million in H1 FY2018, while operating margin declined by 70 basis points to 21.5 per cent for the period. 

For the H1 FY2019 period, the company’s PBT (Profit before taxation) rose by 8.7 per cent to £313.9 million versus £288.7 million in H1 FY2018.

The company’s earnings per share rose by 8.3 per cent from 191.6 pence in H1 FY2018to 207.5 pence in H1 FY2019. The interim dividend per share rose by 5.0 per cent to 50.4 pence, while net asset value per share increased by 15.7 per cent to 2,189 pence.

To drive the long-term performance of the business, the company continues to focus on return on capital employed as a critical performance indicator, and in the first half of FY 2019, it remained strong at 24.2 per cent, though decreased by 110 basis points over the year. A continued strong performance was achieved from a conservative balance sheet, with the group maintaining a post-tax return on equity at a high level of 19.4 per cent. 

Key Performance Indicators
 


Number of homes sold
It demonstrates how well the company’s business model is able to deliver volume growth. In the FY2018 period, the company sold 10,307 homes, which was 6.9 per cent over FY2017 performance.


Operating margin
It tells how well the company’s business is being operated. The company’s operating margin declined by 20 basis points to 22.1 per cent in the FY2018.
 

Earnings per ordinary share

This measure checks the profitability of the company, year on year. The Bellways’ EPS had surged by 14.2 per cent to 423.4 pence in the FY2018.
 

Customer satisfaction score (%)

This measure checks how well the customer is satisfied with the property bought and related services. The company’s satisfaction score for the company increased by 80 basis points to 86 per cent in the FY2018.


Operating profit (£m)

This measure checks the efficiency and profitability of the core business of the company. Operating profit is also used to measure annual bonus payment of directors’. The Bellway’s operating profit surged by 14.2 per cent to £652.9 million in the FY2018.

Financial Ratios
   
 
The reported gross margin in H1 FY2019 declined by 0.5 per cent to 25.4 per cent against 25.9 per cent reported last year for the same period. The reported EBITDA margin of 21.7 per cent for the H1 FY2019 stood higher than the industry median of 17.3 per cent. The reported operating margin in FY2018 declined by 0.7 per cent to 21.5 per cent from 22.2 per cent reported last year for the same period. Net margin reported was 17.1 per cent for the first half of the financial year 2019, reflecting a decrease of 0.6 per cent when comparedwith last year data for the same period. Return on equity for the H1 Financial year 2019 stood at 9.7 per cent, which was higher than the industry median of 9 per cent. On the liquidity front, Bellway Plc’s current ratio was higher than the industry median of 3.51, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Bellway Plc’s was 0.02x, which was lower as compared to the industry median of 0.05x, reflecting that the company is less leveraged as compared to its peers.  

 
Share Price Performance


Daily Chart as at July-08-19, before the market close (Source: Thomson Reuters)

On July 08, 2019, at the time of writing (before the market close, at 12:32 PM GMT), Bellway Plc shares were trading at GBX 2,741.00, down by 0.69 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 3,233.00/GBX 2,407.00. At the time of writing, the share was trading 15.22 per cent lower than the 52w High and 13.88 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 242,872.40; 30 days – 242,052.90 and 90 days – 270,341.11. The average traded volume for 5 days was up by 0.34 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.67, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £3.40 billion, with a dividend yield of 5.27 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)
 


To compare Bellway Plc with its peers, Price/Cash Flow multiple has been used. The peers are Springfield Properties Plc (NTM Price/Cash Flow was 21.32), Volution Group Plc (NTM Price/Cash Flow was 9.66), McCarthy & Stone Plc (NTM Price/Cash Flow was 8.53), Ibstock Plc (NTM Price/Cash Flow was 12.17) and Berkeley Group Holdings Plc (NTM Price/Cash Flow was 14.62). The Average of Price/Cash Flow (NTM) of the company’s peers was 13.2x (approx.)

Method 2: Price to Earnings Approach (NTM)


To compare Bellway Plc with its peers, Price/Earnings multiple has been used. The peers are Taylor Wimpey Plc (NTM Price/Earnings was 7.86), Barratt Developments Plc (NTM Price/Earnings was 8.17), Redrow Plc (NTM Price/Earnings was 6.22), Galliford Try Plc (NTM Price/Earnings was 4.73) and AST Groupe SA (NTM Price/Earnings was 6.73). The Median of Price/Earnings (NTM) of the company’s peers was 6.7x (approx.)

Growth and Risk Assessments
The company had been focussing on its build quality and customer support, which had resulted in a higher level of customer satisfaction. The company gained the status of a five-star home builder. The company had strong financial disciplines which helped the company to have a robust and effective balance sheet. The company could engage itself in Legal and regulatory compliance due to the lack of appropriate procedures and compliance, which would result in land development and construction delays.

Conclusion

Uncertainty over Brexit and the future impact on the economy could significantly impact the company’s performance and operations, including shortages of building materials at competitive prices and shortage of appropriately skilled sub-contractors.

However, the company seeks to ensure that there is a minimal short-term effect on the supply chain by engaging with suppliers. Though inflation has been rising in the last few months, putting pressure on the company’s margins, it has taken proactive measures to mitigate cost pressures over the longer term.

These include its new standard house type range, the Artisan collection, which is expected to be delivered in the year ending 31 July 2020 and should result in design, engineering and procurement savings. While the company has successfully undergone a rapid period of expansion and now can deliver up to 13,000 homes per annum from its current divisional structure. Through investment in newer divisions and further expansion of its divisional network, further volume growth is expected both in this financial year and over the longer term.

With modest net bank debt of only £26.6 million (2018 – £131.4 million), the company has a solid balance sheet, helping it to remain agile and respond swiftly to new opportunities.  With continued availability of Help-to-Buy, good access to affordable mortgage finance and high employment supporting strong demand for affordable homes, conditions in the new build UK housing market remain positive.
 
Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 2,760.00 (as on 5th July 2019) with high single-digit upside potential based on 13.20x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 6.70x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 8th July 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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