There was a striking contrast between the bullish remarks of Jason Honeyman on Tuesday morning and the stock market reaction to the Bellway chief executive’s trading update.
At first, the share price wobbled before heading downwards, lopping off nearly £1 a share by last night. This is still a modest reduction on a share worth over £34 and compares with its more than halving to £19 after Covid hit in March last year.
Nevertheless, there have been doubts about the company for a while. The shares’ solid recovery over the pandemic’s first 12 months has given way to treading water in the past two months, despite a chorus of analysts targeting prices north of £40.
Honeyman said: “Demand for our high-quality new homes continues to be strong and customer confidence throughout the wider housing market is resilient. We have continued our front-footed approach to land acquisition, making a record investment in new sites, enabling us to grow sales outlets and meet the demand for new homes in the years ahead.”
Homebuyers have rushed to take advantage of low mortgage rates and the stamp duty holiday on the first £500,000 of property values until the end of this month. It reduces to £250,000 until the end of September before reverting to the standard £125,000. It has been a gift to Bellway, which sells in the £300,000 region. House prices rose by 9.5 per cent in the year to May, the biggest jump for seven years, according to the Halifax house price index.
Not a cloud in sight, you would think, but Sarah Coles, personal finance analyst at Hargreaves Lansdown, injected a note of caution. “House prices dropped in April,” she said, “which is bound to unsettle homeowners after almost a year of accelerating price rises. At this stage, we’re not expecting this to be the ultimate turning point for the market, but it’s a useful wake-up call for buyers.”
As Coles noted, the big uncertainty is Covid variants. A four-week postponement to July 19 is nothing in this context, but more delays or a lockdown this winter could raise unemployment, forcing home sales. And there is a real chance of higher interest rates.
Bellway has bet heavily on shoring up its land bank, contracting nearly 16,000 plots since last July, compared with about 10,000 in each of the two previous years. Honeyman expects 10,000 completions for the year to the end of July, which would take it back to the 2019 figure after last year’s dip. However, labour and materials costs are rising.
Liberum, the broker, is among Bellway’s biggest fans, targeting a £42 share price on the basis of the company’s guidance upgrade and the strength of the new-build market.
Peel Hunt’s analysts said: “A little caution around cost inflation keeps our outer-year forecasts in check, but with the encouraging trading backdrop risks are skewed to the upside.”
Meanwhile, the mournful shadow of Grenfell Tower looms. Although Bellway had nothing to do with Grenfell itself, last week hundreds of people protested about the cladding on its Manchester City Gate development. Bellway has set aside £131 million to deal with its liabilities, which Honeyman believes is adequate, but cladding has the feel of one of those problems with a long tail.
The firm has strengthened its balance sheet from £157 million net debt a year ago to £408 million net cash at the start of this month. Its management hinted in March that the 35p interim dividend should be more than matched at the year-end, a sign of faith in the future. Yet the focus for investors should be on the share price outlook. It is delicately poised.
ADVICE Buy
WHY A tempting opportunity — for the brave
Halfords
During the lockdowns, Halfords basked in the joy of being deemed an essential retailer and stayed open throughout. The travelling public, understandably wary of buses and trains, turned to the company’s market-leading shops, garages and website for bicycles and accessories. In the year to April 2, that produced revenue 13.1 per cent higher at £1.29 billion. Underlying pre-tax profit rose by 40.4 per cent to £96.3 million.
However, there was plenty going on beneath the surface. While like-for-like bicycle sales jumped by more than a half over the year, that concealed a doubling in the first six months and a worrying decline in the second half.
Comparable autocentre (garage) sales were nearly a tenth higher, but demand for tyres, batteries and brake fluid endured what Graham Stapleton, the chief executive, calls a “suppressed market”. This was because lockdowns cut car journeys. Motoring revenue fell by 12 per cent on a like-for-like basis, creditable in a period when car journeys declined by a quarter.
Where do the shares go from here? The March 2020 dip in the share price was the culmination of a two-year slide that has been erased in the past 15 months, taking the shares to their highest level since 2016. It boils down to how far the past year has been a one-off. Travellers are returning to public transport, which may continue to dent Halford’s cycle sales. Possibly all the would-be cyclists have got all they need for now. However, if lockdowns return the picture will change again.
Halfords was in such a parlous state in December 2019, pre-Covid, that Tempus advised avoiding the shares. Stapleton’s new strategy had not yet proved itself and he had to cut the dividend to conserve cash.
The big threat is Amazon, stretching its tentacles into every corner of retail. That is why Stapleton went strongly into service as being less vulnerable to web-based competition and is pushing into electric vehicles.
At 426¼p, the shares are on an undemanding 10.3 times latest earnings and management projections suggest that will drop below ten this year. But the company still faces some stiff hill climbs.
ADVICE Hold
WHY Outlook is promising, but risks remain
