The financial year just finished (end of July) looks like a relatively good one for UK housebuilder Bellway.
This is according to Oli Creasey, equity research analyst at Quilter Cheviot who points out housing completions and company revenue only fell marginally (2% -4%), despite the last 12 months being a challenging environment.
“However, this is partly a timing issue, Creasey explains, “many of the full year 2022/23 sales will have been agreed before mortgage rates rose sharply, and the indications are that full year 23/24 will be considerably more challenging for the company”.
In its latest trading statement the company shows that the private reservation rate has fallen by 36% during the year. The management also stated that mortgage rates in June and July 2023 returned to the levels reached during the Liz Truss government, significantly impacting the volume of sales.
“We note that the order book (sales agreed but likely to complete in FY 23/24) has fallen around 40% year-on-year, suggesting volumes next year will be significantly lower. Bellway’s outlook statement acknowledges this, with completions expected to decrease materially”.
Creasey concedes that this sounds bleak but it is in-line with the experiences of other large housebuilders.
“As with the other builders, sales pricing has remained relatively robust (down 1%), which has provided support to company revenues. The margin has fallen around 250bps, largely due to inflation of build and other costs, but we do expect these inflationary effects to moderate in the coming year.”
AJ Bell investment director Russ Mould comments that analysts are already forecasting a 45% drop in earnings for Bellway in the year to June 2024, due to the sharp drop in completions, higher costs, lower prices and a shift in mix to affordable housing.
“For there to be any further negative surprises that could hit the shares hard, interest rates will have to go higher for longer than thought, or inflation prove stickier than thought”.
Mould says both scenarios are possible but equally, if the Bank of England starts to fear a recession more than inflation and talks of a peak in interest rates and even reductions in the headline rate of borrowing emerge, then housebuilders could benefit.
