Bellway - Ringing up the profits

Bellway (BWY.L): Another stonking set of results from a house builder. In the year to 31^st July 2015, revenues were up 18.9%, with gross margins up 290bps at 24.2%. This helped drive a 44.0% rise in pre-tax profits, to £354.2m. Eps were up 47.5% at 231.5p and the dividend was hiked 48.1% to 77.0p. The return on capital employed is up 430bps to 23.9%, whilst net debt is just £38.5m. This is a reverse from cash held of £3.6m a year ago, but is after £620m of land investment (2014: £460m). The land bank has increased to 36,211 plots from 35,434, with a record 7,752 homes (2014: 6851 homes) being sold in the year. (The previous record of 7,638 was set in 2007 and we all know what happened next….) Within the geographical split, private sales growth in the South out-stripped the North, whilst social housing in the North more than doubled. Private average selling price inflation was stronger in the North, but the absolute level in the South (£290,900) was still far ahead of the North at £212,000. Price increases are necessary because there is some inflation pressure from labour and material costs. On land prices they only say that new acquisitions are meeting internal gross margin and return on capital employed targets, but there must be upward pressure on prices in such a robust market.

Looking forward the group is gunning for “up to 10%” volume growth in FY2016, although the first nine weeks saw a 16% increase. On the dividend they comment that cover is still 3.0x as this year’s hike was only in line with eps growth. They “expect to maintain a similar dividend cover, but will retain the ability to remain flexible and respond to market cycles”.  The shares have been very good performers, having risen from 1460p a year ago to 2451p now. Consensus eps for FY2016 are 252.5p, but I reckon upgrades may be needed now. Using 260p is a PE of 9.4x and a three times covered dividend would be 87p for a yield of 3.5%. Despite the high share price, this still looks attractive. Interest rates will not rise rapidly (if at all just now) and there is clearly a political will to get more houses built, so the industry’s main challenge is to maintain financial discipline in order to extend the cycle for as long as possible. The yields and dividend growth available make this a very attractive sector for income investors just now. If I were to own one stock it would be Berkeley Group. Despite its focus on London (and hence overseas demand) it is arguably the most adept at managing its balance sheet through the cycle. When the music stops, as it will one day, I would expect Berkeley shareholders to suffer less than many others. (Neil Cumming^, 13^th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower