Bellway’s Return of Capital to Aid Share Price and Signal Fiscal Strength

No-moat Bellway’s BWY fiscal 2023 first-half result provided us with little in the way of surprises, having been effectively signaled in the profit warning trading update in early February. Bellway delivered 5,695 homes in the first half, a flat year-on-year outcome. The average selling price rose 1.6% and reflected buoyant housing market conditions that prevailed into late 2022. In turn, ASP growth helped to partly offset searing build cost inflation during the period. Still, operating margin eased 110 basis points year on year to 18.7%.

Our expectations for medium-term profit margin recovery remain intact, so we make no change to our GBX 3,750 fair value estimate. Nonetheless, housing market conditions have soured substantially in recent months and make for a challenged near-term profit margin outlook for Bellway and U.K. homebuilders alike. Indeed, the industry’s profit margins are likely to be squeezed throughout the remainder of fiscal 2023 and into fiscal 2024 as homebuilders battle with a double whammy of heady build cost inflation and a near-term decline in house prices.

Bellway has announced shareholder capital return initiatives in response to the downbeat near-term outlook. Aimed at conveying confidence in the business’ long-term fundamentals, Bellway plans to return GBP 100 million in the form of a share buyback while also maintaining a flat year-on-year dividend payout of GBX 140 per share in fiscal 2023, stepping modestly outside of its preferred dividend coverage ratio of 2.5 times underlying EPS. These initiatives constitute a display of balance sheet strength at a time of cyclically weakened housing market conditions. Further, we think the share buyback—which is aimed, ostensibly, at supporting Bellway’s presently depressed share price—represents sensible and well-timed capital allocation given that Bellway shares trade at a 46% discount to our unchanged valuation.