U.K. homebuilders are out of favor with investors. The sector is pricing in a disaster. On the surface, this fear might seem reasonable. With a rise in U.K. interest rates last week to a 13-year high and warnings that inflation could reach a painful 11% this year, it is no wonder the sector is hated.
Following these developments, one stock that looks very interesting to me is Bellway PLC (LSE:BWY, Financial). The GF Value rates it as significantly indervalued, it has a strong Piotroski F-Score of 7 and a very strong Altman Z-Score of 4. The stock has fallen 36% year to date and is trading at its lowest since September 2020. At just over 5 times forward earnings, this FTSE 250 home construction company is valued nearly as cheaply as after the Covid crash of March 2020. Additionally, the current valuation is nearly the cheapest in a decade.
Last week, the company produced a robust trading update for the Feb. 1 to June 5 period. Bellway saw strong sales demand, with an average of 253 reservations per week (compared to 239 per week in 2021 and 158 per week in 2020), an increase of 5.9% compared to the equivalent period in the prior year.
Management reiterated its earlier guidance for a 10% rise in completions, meaning homes built and sold, to more than 11,100 homes for the full year, at an average sales price of 305,000 pounds ($373,310.85). This is slightly below last year’s average selling price, but still 13,000 pounds ahead of 2019’s. Another increase in completions to 12,200 is expected for next year.
An order book of 8,152 homes, which accounts for two-thirds of Bellway’s 2023’s completion target, means its guidance looks doable, even though some new sites have been caught up in planning delays. Another impressive thing to note about the company is that it has been rationalizing costs. For example, last year’s sales growth was achieved even though the company cut back 26 sales outlets.
Some costs all companies are struggling to contain, however, are labor and wage costs, which might complicate Bellway hitting its guidance for better margins. Inflation is at a mid-to-high single-digit rate for the company, according to Chief Financial Officer Keith Adey.
Bellway is well placed to pass on cost increases to the customer. Its build cost inflation has been offset by house price gains and management expects this trend to continue. The average price for a house sold in the U.K. increased by an annual rate of 10.5% in May, according to Halifax, the country's largest mortgage provider. Given that Bellway constructs a range of standard house types, it has economies of scale with respect to procurement of materials.
Risks
Rising interest rates are obviously a risk for any real estate-related business, but the U.K. base rate is still only 1.25%, which is historically low. The U.K. economy is relatively good with employment rates high and wages rising. In the short term, however, falling real incomes for some prospective buyers, due to rising inflation, is a risk for housing demand.
Bellway has set aside 187 million pounds to fix unsafe cladding, which has hit all developers of apartment buildings in the U.K. Currently, this only covers those apartments built within its typical warranty period of 10 to 12 years. The U.K. government is looking increasing this to 30 years, and the amount needed would rise to 300 million pounds.
Any extra expenses from fixing cladding will play out over several years, management has indicated, and Bellway’s net cash balance of nearly 160 million pounds gives it flexibility. Of course, any extra expenses would mean Bellway would be even more incentivized to hit its completion targets and keep construction and marketing costs under control.
Other U.K. homebuilders
Some of the other main U.K. hombuilders are also worth looking at. While the GF Value rates Berkeley Group Holdings PLC (LSE:BKG, Financial) as fairly valued, Barratt Developments PLC (LSE:BDEV, Financial) and Taylor Wimpey PLC (LSE:TW., Financial) are rated significantly undervalued and modestly undervalued.
Conclusion
Dividend expectations for this year are for just over 1.36 pounds, rising to 1.47 pounds next year. This gives an attractive dividend yield of nearly 7% at the current share price. Bellway’s cheap valuation, combined with its strong Piotroski F-Score and Altman Z-Score makes it the most attractive cheap U.K. homebuyer for me.
