Back in the autumn, this column flirted with the idea of buying Bellway shares, but ultimately advised investors to hold fire given the uncertainty still hanging over the property market at the time.
The investment case has changed materially since then with mortgage rates having dropped sharply, and that has been reflected in Bellway’s share price, which is up by a fifth over the past few months.
That rise might deter some investors, worried that they have missed their chance, but there remains reason for optimism for a sector that has suffered badly from the rapid rise in interest rates over the past 18 months and the higher mortgage rates which have followed.
Although Bellway’s shares are at their dearest for ten months, they remain almost a third below their pandemic peak in April 2021.
The City is confident that interest rates are now as high as they will get and the expectation is that they will be cut at some point over the coming months, which will reduce the cost of homeowners’ monthly mortgage repayments.
Uncertainty around house prices has also contributed to the paralysis in the housing market over the past year or so. The constant talk that prices will be lower next week than they are today has kept would-be buyers on the sidelines.
However, those worries of a house price correction have proven unfounded; Nationwide thinks prices fell less than 2 per cent in 2023 and the consensus is that they will not move much this year either.
Combined with cheaper mortgage rates, the softening rhetoric about prices should tempt buyers off the fence ahead of the all-important spring selling season, which is traditionally developers’ busiest time of year.
Even if demand does not come back organically, the government, desperate for votes ahead of the general election, is likely to step in with some sort of help for first-time buyers. There are murmurs that Help to Buy, which sparked a decade-long boon for the housebuilding industry but ended last year, could be resurrected.
Those factors should buoy housebuilders’ share prices more generally, but Bellway looks well-positioned to fare better than its rivals, not least because it is more exposed to first-time buyers than most. Analysts at RBC estimate that 23 per cent of its homes are one and two-bed apartments, popular with first-steppers, whereas the sector average is about 15 per cent.
That Bellway has been more active in the land market than many other developers over the past year or two should also leave it well-placed as and when demand returns.
An argument can also be made that Bellway’s landbank is undervalued, especially compared to its peers. All housebuilders record their land on their balance sheets at the cost they paid for it, which analysts call the book value. The jump in house prices over the past few years means that, if that land were revalued at today’s prices, it would likely be worth more than developers paid originally.
Indeed, the shares of builders such as Taylor Wimpey, Persimmon and Barratt all trade at a premium to their book values, but Bellway trades at a 13 per cent discount; the implication being that its land is not worth what management paid.
The difference has stumped City analysts, most of whom agree that there is likely hidden value in Bellway’s landbank. If sales rates start to pick up again and house prices avoid a steep fall, as most economists predict, the gap between Bellway’s book value and its share price should start to narrow.
Although the outlook is improving and sales should improve after a lacklustre 2023, the consensus in the industry is that a fuller recovery is unlikely to emerge until towards the end of this year, at the earliest. But the stock market is a gauge of what investors think will happen in the future and not what is happening now.
It may take several months, possibly longer, for builders’ sales to return to something like normal, but share prices will rebound long before that. Typically, the housebuilders’ share prices would trade at about 1.4 times their book values. Currently, the sector trades at 1.1 times book value, and Bellway at even less, suggesting that a buying opportunity remains even after builders’ recent rally.
Advice Buy
Why Government will ensure property market picks up and Bellway trades at an unjust discount
CVS Group
Since the competition regulator launched a review of the veterinary services market in September, shares in CVS Group have fallen by more than a fifth (Alex Ralph writes).
Both the Competition and Markets Authority and CVS, one of Britain’s biggest vets groups, are due to issue updates early this year, providing an opportunity for investors to revisit the company’s prospects. There are, however, grounds for optimism.
The CMA is looking into how services for household pets are bought and sold in the £2 billion market in response to concerns that veterinary costs are rising more rapidly than the rate of inflation after a spate of consolidation in the industry. City analysts believe that this review is not likely to end in price controls but rather in “sunlight” remedies. These would be designed to improve cost and ownership transparency, including around which vets’ practices are owned by companies such as CVS or its private equity-backed rivals.
Richard Fairman, CVS’s chief executive, has rejected concerns that the company has been profiteering in a market where customers are often emotional and are in a hurry to get care for their animals, birds and the like. Although the group’s profit margin has grown over the past decade, there is a consensus among analysts that the level, at 20 per cent last year, does not suggest that it has taken advantage.
Panmure Gordon, the City broker, initiated coverage of CVS last month with a “buy” rating and £20.85 target price, arguing that the review presented a buying opportunity for the stock. The shares closed at £16.29 yesterday, down 1.9 per cent, or 31p.
CVS’s management also has been buoyed by the company’s ability to continue to make bolt-on acquisitions of independent practices in the UK. In its trading update issued at the time of its annual shareholder meeting in November, CVS said that it had completed deals for four practice sites, for a combined £10.1 million, after the submission of briefing papers to the competition regulator.
CVS is due to issue a trading update on January 25, before interim results on February 29, potentially coinciding with the eagerly awaited update from the regulator.
Advice Hold
Why Share sell-off appears to be overdone
