Housebuilder Bellway (BWY) reported solid progress in the half year to the end of January but cautioned it could have to increase provisions considerably for fire safety work.
The news overshadowed a strong first half performance and management’s positive full year view, sending the shares 2% lower to £25.42.
BUOYANT SALES
Despite the challenges facing the industry, including raw material and labour shortages, Bellway managed to build more houses than in the same period last year or 2019.
Revenues were up 3.5% to £1.78 billion while gross profits rose 11.2% to £397.5 million thanks to disciplined cost control and ‘price optimisation’ as the company put it.
Demand for new homes continues to rise despite the house price to earnings ratio hitting an historic high.
The firm’s forward order book as of March was just under 7,500 homes, with a market value of £2.2 billion, compared with around 6,000 homes and £1.64 billion a year ago.
That puts Bellway on track to deliver a 10% increase in volumes to over 11,100 homes this year.
Thanks to the high visibility of its order book and an improving mix of housing, the firm is confident average selling prices will be over £305,000 this year.
CLADDING CONCERNS
However, enthusiasm over the outlook was tempered by questions over the firm’s potential future liability for historical fire safety issues.
To date the company has put aside close to £187 million, including £22.1 million in the last six months, to cover its standard 10- to 12-year warranty period.
If the government presses ahead with its call for builders to fix fire safety issues over an extended 30-year time frame, which is beyond the scope of Bellway’s existing provision, management warned it ‘would result in a significant additional provision’.
While the firm had almost £200 million of net cash at the end of January, much of that is earmarked for growth investment.
Investors are therefore concerned that generous dividend payouts, which have been a big reason for owning house building stocks, may be put on hold while the industry fixes the cladding issue.
