Questor share tip: Hold Bellway for income

Bellway
£15.65+82p
Questor says HOLD

HOUSEBUILDER Bellway [LON:BWY], one of Questor’s tips of the year, announced record revenues and earnings per share in its annual results yesterday, sending its shares almost 5pc higher.

The shares still look attractive for their income as the UK housing market stabilises, supporting higher prices and profits for the builders.

John Watson, chairman of the FTSE 250-listed group, said it had been an “exceptional” year in which the company hit record revenue and profits. Fears that the UK housing market was running out of steam have proved unfounded.

Mr Watson said: “The outlook remains positive with a record forward order book and this should enable the group to deliver volume growth of around 10pc in the current financial year.”

The forward order book increased by 51pc to £975.4m by September 29 from £644.2m a year earlier. The value of the order book represents 4,435 homes. With brokers estimating sales for the year ahead of 7,540, that means that 59pc of sales are already in the bag.

Revenue increased by 33.8pc to £1.49bn, gross profit jumped 55.6pc to £316.4m and pre-tax profits soared by 74.5pc to £245.9m. Investors were rewarded with a 73.3pc increase in the annual dividend to 52p, ex-dividend December 11 and payable January 14.

The board said they expect to maintain dividend cover of three times earnings. So, with Bellway on target to achieve revenue of £1.67bn, pre-tax profits of £295m and earnings per share of 187.7p for the full year ended July, that leaves the way open for a 62p total dividend, or a yield of 4.3pc.

The company increased spending on development land by 23.7pc, bringing the value of land holdings to £1.12bn at the end of July, up from £907.3m at the same stage last year. The land bank increased to 35,434 plots for new homes, up from 34,991 a year earlier. Bellway has plenty of opportunity to continue revenue and profit growth.

Bellway sold 6,851 homes in the year ended July, up 21.2pc on a year earlier. The full-year growth rate has slowed on the 25pc reported in the first half but it was still ahead of previous guidance of around 6,700 homes and ahead of both broker and market expectations.

The company is not merely selling more homes it is also selling them at higher prices. A 10.5pc rise in average selling price to £213,200, from £193,000 a year earlier helped the company’s operating margin rise to 17.2pc, which was ahead of analysts’ forecasts.

The housing group also finished the year with a strong balance sheet, it had net cash of £5.1m at the end of July, reversing the net debt position of £5.8m a year earlier. The cashflow was also strong during the year with cash generated from operations after tax and interest up 30pc to £76.8m, that covers £45m of dividend payments 1.7 times. The pension deficit was reduced to £7.9m from £9m a year earlier.

Bellway said that customer confidence had returned and the Financial Conduct Authority’s Mortgage Market Review and a tightening supply of higher loan-to-income mortgages provided a positive outlook for the UK housing sector. The shares, trading on 7.9 times earnings and offering a dividend yield of 4.2pc look reasonably attractive, especially when considering it has to deliver revenue growth of 12.6pc and profit growth of 20pc within the next 10 months to hit targets.

Questor first recommended buying the shares last year (£14.30, December 14) and they have easily outperformed the wider market since, rising by 8.5pc against the FTSE 250 which is down nearly 4pc so far this year. There has also been another 52p in dividends paid throughout the year.

We picked Bellway as one of our tips of the year due to the assistance it is getting from the Help to Buy scheme and we would hold on to pick up that income.