March 2022
Bell(way) of the ball
When things get a little tricky internationally, as they are at the moment and as they were when Brexit and COVID first hit the news, the UK market often reacts by
trashing banking and housing stocks like there is no tomorrow. But tomorrow inevitably arrives and often it brings with it an
increased demand for housing.
In the past, we have had
success taking advantage of these
drops in share price by investing in
high-quality housing stocks and waiting for the market to
correct. Because of the volatility in recent times, even well-run, profitable housing stocks frequently become
undervalued, making them a relatively
safe investment when the markets take a downturn. We do already own 2 of these profitable housing companies:
Redrow PLC
and
Kingfisher PLC, but we believe this is a time to be
greedy so have decided to add a third that is looking particularly undervalued this month.
Bellway PLC has had an
excellent 2021, surpassing its performance in 2020 by a
large margin and - relative to their financials - they are now looking
undervalued.
Source: Bellway PLCIn February, the company
reported that they are well on the way to
exceeding their 2021 results and are anticipating
further growth in both 2022 and 2023.
Highlights included: - Strong underlying demand, with a
5.8% increase in the overall reservation rate
- 3.8%
increase in the private reservation rate
- Growth in volume output, a record
5,694 completed homes (2021 – 5,656)
- 2.8% increase in the average selling price to
£311,800 (2021 – £303,206) and is expected to be over £300,000 for the full financial year
- Underlying operating margin for the full financial year increased to
18% (31 July 2021 – 17.0%)
- Strong forward sales position, with an order book comprising
6,628 homes (2021 – 5,889 homes) and a value of
£1,940 million (2021 – £1,625 million).
- Volume growth of around
10% to over
11,100 homes
expected this financial year (31 July 2021 – 10,138 homes) and expected output of around
12,200 homes in financial year 2023
Downsides? - Balance sheet and net cash down to
£196 million (2021 – £346.4 million)
Initially the market reacted
favourably to these results, the share price increasing to above
£30, however that was quickly forgotten about in light of the ongoing conflict in the Ukraine and today the price is back below £28 at the time of writing.
- Strong underlying demand, with a 5.8% increase in the overall reservation rate
- 3.8% increase in the private reservation rate
- Growth in volume output, a record 5,694 completed homes (2021 – 5,656)
- 2.8% increase in the average selling price to £311,800 (2021 – £303,206) and is expected to be over £300,000 for the full financial year
- Underlying operating margin for the full financial year increased to 18% (31 July 2021 – 17.0%)
- Strong forward sales position, with an order book comprising 6,628 homes (2021 – 5,889 homes) and a value of £1,940 million (2021 – £1,625 million).
- Volume growth of around 10% to over 11,100 homes expected this financial year (31 July 2021 – 10,138 homes) and expected output of around 12,200 homes in financial year 2023
- Balance sheet and net cash down to £196 million (2021 – £346.4 million)
Conclusion
The share price of UK housing stocks has
decreased over the last month, leaving several companies looking
undervalued. None less so than Bellway PLC, which released a very
strong set of results for 2021 and healthy guidance for the next 2 financial years. We want to take advantage of pessimistic market conditions to snap this stock up at a
bargain price and hold it until the market corrects, collecting a
4.2% dividend along the way.
We will be adding BWY to our portfolio on Tuesday.
