Key Investment Highlights
 

1. Bellway PLC (LON: BWY) is a housebuilding company based of the UK and is identified as amongst largest housebuilders, with operations in more than 22 divisions.

2. From the last 70 years, the company is building new homes at desirable locations with an exceptional build quality.

3. BWY’s divisional structure with local management teams, respond to specific customers’ demand and acquire land through detailed local knowledge.

4. The Group treat its customers with high-quality services and is endorsed with a rating of 9 out of 10 by customers.

5. Bellway has the operational and financial strength to support the expansion of divisional network for additional growth and delivering long-term returns to shareholders.

6. The Group reported strong revenue growth with the decent operational performance for the current period.

7. Witnessed significant growth in volume with a strong demand for private homes and solid order book. 

8. Being the 4^th largest homebuilder in the UK, the group actively seeking to collaborate with brownfield and greenfield sites owners, focusing on superior quality homes and creating flourishing communities.

9. Lowly geared balance sheet provides resilience, strength, and flexibility to the business. 

10. Demand for affordable new homes is likely to surge with the availability of ‘Help to Buy’ scheme coupled with low interest rates.

11. Long term cost savings are expected through the ‘‘Artisan Collection’ standardisation of house types.

12. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Bellway PLC (LON: BWY) – Robust Order Book and an Eligible Issuer for the Covid Corporate Financing Facility.

Bellway PLC is a FTSE-250 listed residential property developer. It is engaged into housebuilding and serves the population across England, Scotland, and Wales regions. The Company sells homes through two main brands, namely Bellway and Ashberry. It offers a wide range of residential properties from one-bedroom apartments to six-bedroom family homes and caters to social housing as well. It has been into home building business for the past 70 years and, presently, it operates through 22 divisions with a workforce of around 3,000 people. The company has been recognised as a five-star homebuilder (as per Home Builders’ Federation Customer Satisfaction survey) for the fourth year in succession. By 2023, the company aims to reduce its direct carbon emission by 10 per cent. Bellway PLC was admitted to the London Stock Exchange on 17^th May 1979.

In June 2020, the group will release its next trading update.

 
(Source: Presentation, Company Website)

Key Fundamental Statistics



Segments at a Glance

The Group aggregates the divisions into one reporting segment, while splitting unit sales and average selling prices into the south, north, private and social. The bifurcation of which can be seen in the picture below:


(Source: Presentation, Company Website)

A Glimpse of Key Performance Indicators in 2019 vs 2018
 

1. In FY2019, the group showed 5.7 per cent growth in ‘Number of Homes Sold’ and stood at 10,892 as against 10,307 in FY2018.

2. The Number of plots in pipeline stood at 16,300 in FY2019 versus 14,200 in FY2018, reflecting a growth of 14.8 per cent.

3. Customer satisfaction score stood at 86.4 per cent in FY2019, reflecting an increase of 4bps from FY2018.
 

(Source: Annual Report, Company Website)

Significant Developments of 2020
 

1. 30^th April 2020: The Board of Bellway decided to postpone the payment of interim dividend and defer all discretionary land expenditure, to conserve cash and protect liquidity.

2. 22^nd April 2020: The Board of directors of Bellway decided to take voluntary reduction of 20 per cent in basic salary from 1^st April 2020 to 31^st May 2020, to donate for charity during COVID-19 crisis.
 

Order Book Highlights


(Source: Half Yearly 2020 Company’s Presentation)


Top Shareholders Statistics 
 
 

Trading Update and Actions taken to Mitigate the Impact of Covid-19 Pandemic
 

1. On 30^th April 2020, Bellway released an update on the trading performance for the period starting from 1^st August 2019 to 26^th April 2020 and response taken against coronavirus to recommence activities.

2. The Group is focused on ensuring the health and safety of its employees, subcontractors, and customers. The group has taken measures to preserve cash, reduce costs, freezing all recruitment activities and maintaining superior customer services.

3. The board has decided not to pay any dividend until the situation gets normal and will be taking 20 per cent cut in fees and basic salary from 1^st April to 31^st May 2020.

4. As per the guidance issued by the Government, the construction sector is crucial for the development of the UK economy, and if sites comply with Operating Procedures of Construction Leadership Council, then they can operate. The group, along with its supply chain, re-opened its construction sites in a phased manner from 4^th May 2020.

5. During the period, the company completed 6,506 homes sale with an order book of GBP 1,567 million as on 26^th April 2020 and 5,976 plots.

6. BWY has extended the maturity dates since 23^rd March 2020 of tranches with the value of GBP 125 million. The Group is also eligible from CCFF (Covid Corporate Financing Facility) with a limit of GBP 300 million. The total access to funds stood at GBP 845 million with net bank debt of GBP 98 million as on 26 April 2020.
 

Financial Highlights – Decent Top-line Growth in H1 FY2020 (31^st January 2020)

(Source: Interim Report, Company Website)
 

1. In the first half of the financial year 2020, the group housing completion surged by 6.3 per cent to 5,321 homes versus 5,007 homes in H1 FY2019.

2. The revenue surged by 3.6 per cent to GBP 1,541.4 million in the first half of the financial year 2020 versus GBP 1,488 million in the first half of the financial year 2019.

3. The group’s operating profit declined by 7.1 per cent to GBP 297.2 million in H1 FY2020 versus GBP 319.8 million in H1 FY2019, with an operating margin of 19.3 per cent and was in line with management expectations.

4. The balance sheet remained well-positioned with net cash of GBP 4.6 million and GBP 545 million of committed bank facilities, reflecting a strong financial foundation.

5. The Group has shown the ability to generate a higher level of cash for a prolonged period.
 

Financial Ratios – Strong Profitability Margins versus the Industry Median


 (Source: Refinitiv, Thomson Reuters)

The reported EBITDA margin, Pretax margin and Net margin  were 19.5 per cent, 18.9 per cent, and 15.5 per cent, respectively, for the first half of the financial year 2020 and stood higher as compared to the Industry Median metrics. Return on equity for the H1 of the financial year 2020 stood at 8 per cent, which was higher than the Industry Median. On the liquidity front, Bellway Plc’s current ratio of 5.24x was higher against the industry median of 3.70x. On leverage front, the debt-equity ratio of the Bellway Plc’s was 0.01x, which was lower as compared to the industry median of 0.06x.

Share Price Performance Analysis


Daily Chart as on 18^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 18, 2020, at the time of writing (before the market close, at 8:35 AM GMT+1), Bellway Plc shares were trading at GBX 2,511.00, up by 3.63 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,336.00/GBX 1,735.50.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 30-day simple moving average price, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Bellway Plc with its peers, Price/Earnings multiple has been used. The peers are Ibstock Plc (NTM Price/Earnings was 13.23), Volution Group Plc (NTM Price/Earnings was 12.13), Barratt Developments Plc (NTM Price/Earnings was 9.62), LSL Property Services Plc (NTM Price/Earnings was 9.20) and Redrow Plc (NTM Price/Earnings was 6.70). The Median of Price/Earnings (NTM) of the company’s peers was 9.60x (approx.).

Method 2: Price/Cash Flow (NTM) Approach



To compare Bellway Plc with its peers, Price/Cash Flow multiple has been used. The peers are Vistry Group Plc (NTM Price/Cash Flow was 11.53), LSL Property Services Plc (NTM Price/Cash Flow was 11.25), Taylor Wimpey Plc (NTM Price/Cash Flow was 10.09), Persimmon Plc (NTM Price/Cash Flow was 8.86) and Redrow Plc (NTM Price/Cash Flow was 7.40). The Average of Price/Cash Flow (NTM) of the company’s peers was 9.80x (approx.)

Valuation Metrics

                              
(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

Bellway Plc has an indicative dividend yield of 4.13 per cent, which is higher than the industry dividend yield of 4.00 per cent and against the sector dividend yield of 4.01 per cent. This needs to be considered in view of the recent correction in the stock price. Also, with company’s decision of not paying the dividend in the interim, the sustainability of yield is subject to various factors, and we expect Bellway to re-consider payments post assessing the overall financial situation in the post-COVID era. 

Bellway Plc Vs FTSE-Mid 250 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Bellway Plc share price has delivered 11.82 per cent returns as compared to negative 11.05 per cent returns of FTSE-Mid 250 index, which shows that the stock has outperformed the index during the last five years.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

Bellway Plc has delivered a total return of 33.84 per cent in the last five years versus the total return of FTSE All share of 1.85 per cent for five years period.
 
Industry Outlook

As per the ResearchAndMarkets report published in March 2020, the building construction industry in the United Kingdom is projected to reach GBP 176.5 billion by 2024 (compounded annual growth rate of ~2.8 per cent). The ongoing disruption continues to create an imbalance between demand and supply for quality homes at affordable prices. Moreover, the Government’s Help to Buy scheme in the low-interest rate scenario provides affordability to mortgage products and housing market.

Growth Prospects and Risk Assessment

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

Business Outlook Scenario

During the first half of the fiscal year 2020, fundamentals have witnessed substantial growth. The decent growth in housing completions up by 6.3 per cent from 5,007 in H1 2019 to 5,321 in H1 2020. Notwithstanding, the board expects the full-year average price to be better than the previous year.

The Group is providing the maximum benefits to the clients from the service and quality improvement initiatives. The new standard house type range, the Artisan collection, which is expected to be delivered in the year ending 31 July 2020 should result in the design, engineering, and procurement savings. Through investments in the newer divisions and further expansion of its divisional network, accelerated volume growth is expected both in this financial year and over the longer term.

Significantly growing trading position and forward sales should be able to offset the cost pressure, which industry is currently facing. The Group’s solid balance sheet and operational capacity should reap the opportunity falling in medium and long-run period regarding affordably priced new homes and a rising rate of private homes. To support the economic growth, the group has re-opened its construction sites in a phased manner from 4th May 2020.

Bellway continues to respond to the market conditions with disciplined volume growth and strong customer satisfaction score. Bellway group has maintained a long-standing relationship with sub-contractors, suppliers, and consultants to provide affordable homes and thus, creates sustainable value for shareholders. Due to COVID-19 mayhem, there is a threat to the wider economy regarding liquidity; hence, the group has halted new site acquisition and postponed production expenditures, while adopting several other cash preservatives. Help to Buy scheme accounts for almost 36 per cent of all homes sold by Bellway, which is greater than the proportion of the overall market in the new build sector. Moreover, the company has made investments in new sites during the H1 FY2020, which surged their total reservation rate to 194 per week versus 183 per week in H1 FY2019.

Over the course of 3 years (FY16 - FY19), the company’s Net Income surged from GBP 2,240.70 million in FY16 to GBP 3,213.20 million in FY19. Compounded annual growth rate (CAGR) stood at around 8.43 per cent.

Based on the decent growth 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 2,423 (as on 15^th May 2020), with lower double-digit upside potential based on 9.60x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 9.80x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 18^th May 2020).

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