Housebuilder Shares Are Undervalued

The Week: Morningstar columnist Rodney Hobson is pleased with Bellway's latest results, why Boohoo is a risky trade and the battle for William Hill may have more to run

Rodney Hobson 23 October, 2020 | 8:51AM
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The Week

Half a dividend is better than none, so let’s give half a cheer for housebuilder Bellway (BWY), which has reinstated the payout with a final 50p a share. While that is only half the level of last year’s final, it is highly welcome as shareholders got nothing at the interim stage. If only companies in other sectors could be so quick to return to something like normal.

Housebuilding is one sector you would expect to bounce back from lockdown and pent-up demand is currently fuelling a surge at Bellway. Average sales reservations were up 31% year-on-year in August and September to take the order book to a record 6,624 homes worth nearly £1.9 billion.

Chief executive Jason Honeyman said with exquisite understatement: “The recovery has been quite pronounced.”

It needed to be. In the year to July Bellway sold almost one third fewer homes than in the previous 12 months, revenue fell 31% and pre-tax profits slumped 64% thanks to site closures during lockdown.

Help to Buy has accounted for 57% of sales since March. While this scheme is of debatable value to first-time buyers it is clearly vital to housebuilders. Some day they will need to be weaned off it but that isn’t happening yet. The cut in stamp duty for properties up to £500,000 is also helping, although that concession, too, will disappear in time.

Figures from HM Revenue and Customs show that transactions are now less than 1% below last year’s levels, and the Halifax says selling prices are rising faster than at any time over the past four years.

Bellway shares plunged from 4,300p in February to 1,800p in March and the recovery since has been anaemic, to 2,960p at best. The latest results have had little effect and the shares still languish just above 2,500p. I don’t have a stake in Bellway but I do have stakes in three other housebuilders so bear that in mind when I say I believe the sector is undervalued. We still have more potential house buyers than homes available.

Boohoo is Quite a Ride

It’s swung between Boo! and Hoo! since February at fast fashion group Boohoo (BOO), where a scandal over allegations of modern slavery at a supplier sent shockwaves through investors. Then the company was deemed to have reacted favourably, only for allegations to emerge that it was not drawing up its accounts properly, a challenge that wasn’t helped by the departure of long-term accountants PwC.

Swings from 327p to 157p to 412p to 210p to 390p to 240p are great for short-term traders but a bit racy for long-term investors, although this type of pattern does open up myriad buying and selling opportunities.

Directors have snapped up shares during the latest slump. One always has to judge whether such a move smacks of desperation to shore up the share price or indicates a genuine belief that the shares are seriously undervalued. I think the latter applies in this case.

The shares currently stand around 265p. They could well shoot back above 400p, while the downside looks clearly limited to 210p. Enjoy the ride – if you have the nerve for it.

Place Your Bets

Where a company has accepted a cash offer, its results are generally of only passing interest. Bookmaker William Hill (WMH) is an exception, because there are lingering hopes of a rival bid to top the 272p agreed bid from Caesars Entertainment.

Hill is benefiting from the return of sports fixtures after a torrid time that saw revenues fall by 25% in the first nine months of 2020. Recovery prospects may just be convincing enough to tempt private equity firm Apollo to top the bid.

I suspect not, but it is probably right to hang on at the current price of 280p. The downside is strictly limited, while the upside in a bidding war is substantial.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.