Bellway: Investors Remain Tense About U.K. Housing Market Downturn; Shares Very Undervalued

Bellway’s BWY June trading update provided investors with little in the way of freshly disappointing news or a downgraded near-term outlook. As we’d expected, the no-moat homebuilder’s performance in recent months has reflected the cyclical challenges facing the U.K. homebuilding industry, which include shaky homebuyer confidence, pressured house prices amid the recent rise in mortgage interest rates, and heady build cost inflation that is yet to retrace to a more normalised level. Predictably, Bellway made no change to its fiscal 2023 guidance, given that it was already 95% forward sold for the fiscal year as of late March. Our fiscal 2023 estimates are also largely unchanged; we continue to expect EBIT of GBP 538 million and EPS of GBP 3.21.

Nonetheless, investors clearly had hopes that Bellway’s trading update would provide signs that green shoots are forming in the housing market. With such indications lacking, investors sent shares in Bellway and its U.K. homebuilder peers as much as 3% lower at the time of writing. Evidently, investors remain anxious about the near-term cyclical challenges while they overlook the positive long-term fundamentals that exist for Bellway and its peers. Bellway shares continue to screen as materially undervalued, trading at a significantly depressed price/book value of 0.8—versus a five-year average of 1.2—and a 41% discount to our unchanged GBX 3,750 fair value estimate.

The near-term outlook for the homebuilders remains downbeat as the housing market wanes cyclically. Indeed, we forecast a material contraction in Bellway’s earnings in fiscal 2024, with EBIT expected to contract by about 31% to GBP 372 million as home completion volume falls and house price headwinds keep profit margins under pressure.