Bellway: Although a Weak Market in 2024 Looms on the Horizon, Shares Remain Undervalued

As we’d expected, no-moat Bellway’s BWY performance in recent months has reflected the cyclical challenges facing the U.K. homebuilding industry that include mortgage interest rate volatility and cost of living pressure. It is not all bad news for the housebuilder. Build cost inflation has fallen from high-single-digit levels reported in early 2023 and product availability has increased—two short-term tailwinds in line with our estimates.

Predictably, Bellway made little changes to its fiscal 2023 guidance as 2023 home completions fell to 10,945 from the previous estimate of 11,000 and 2023 average selling price rose to GBP 310,000 from GBP 300,000. Our fiscal 2023 estimates are also largely unchanged; we continue to expect revenue and margin in line with guidance. We will update the model with these changes but foresee no changes to our fair value estimate or moat.

Bellway’s near-term outlook is downbeat with the U.K. housing market in the throws of a cyclical downturn in 2023. As a result, we expect Bellway’s earnings to contract materially in fiscal 2024 and forecast a material decline in earnings as home completion volumes fall and house price headwinds keep profit margins under pressure. While no official 2024 guidance will be provided until the October trading update, the firm’s year-end order book is considerably lower, down to 4,411 homes from 7,223 at year-end 2022, further supporting our belief. Still, we think the long-term through-the-housing-cycle prospects for Bellway remain bright and expect cyclical recovery in home completion volumes and earnings from fiscal 2025 onward.

The decade ahead is poised to be a rewarding one for all the major U.K. homebuilders under our coverage as an ageing U.K. population supports long-term demand for new housing. At midcycle, we forecast an anticipated 250,000 gross additions to the U.K.’s housing stock per year, around 9% greater than the average over the prior housing cycle of 2013-22.