First half results from housebuilder Bellway (BWY) were broadly in line with guidance given in February but a big increase in the dividend and slightly better-than-expected earnings performance helps lift the shares 3.1% to £31.45 in early trading.
Earnings per share is up 17%, 1% better than expected, as the company maintains margins and posts a 15% increase in sales. The dividend is up 28% - but it is important to note this is being done to even out the balance between first half and second half payments.
AJ Bell investment director Russ Mould notes that housing market conditions suggest future earnings growth will have to come from increased volumes rather than house price inflation.
‘'Bellway has a solid track record in this regard but there are execution risks and planning issues to overcome in ramping up output of homes - its rival Berkeley (BKG) recently noted the operating environment did not support a step-up in production levels,’ he says.
CAN BELLWAY STAY ON THE GROWTH PATH?
Liberum analyst Charlie Campbell is optimistic the business can overcome these challenges. Reiterating his ‘buy’ recommendation and £39.30 price target, he says: ‘Bellway's shares remain a top pick in the sector for its long-term track record of profitable volume growth without operational hiccup, at a compelling valuation.
‘Volume growth should be sustained across its diverse geography, protecting profit growth as house price inflation slows.’
Shore Capital’s Robin Hardy is less convinced. ‘Bellway has again flagged that current margins appear unsustainable in reporting that land is being acquired with a 24% gross margin against almost 26% now being reported.
‘Without the tailwind of house price inflation (which had averaged 5.5% since 2013) there is still a material risk of a mean reversion in margins, even before considering the impact of weakening sales prices.’
