Another day and another announcement from a stock in the Compound Income Scores portfolio. As expected these were strong results from Bellway (BWY) with revenues up by 18.9% to £1765.4 million which seems to be about £20m ahead of forecasts. With operating margins rising by over 3% to 20.4% this helped earnings to rise to 231.5p and they hiked the dividend by 48% to 77p, which was in line with the earnings growth as promised. Both of these figures were therefore ahead of consensus forecasts which were for 220.1 p and 72.5p for a 5% & 6% beat respectively.
Their return on capital employed increased to 23.1% as they continued with their disciplined approach towards investment and they completed 7752 homes. As part of this they invested a further £620m this year into their owned and controlled land bank which has risen to 36,211 plots or around 4.75 years worth of houses at the current rate of completions. Despite this, strong operational cash flow meant that debt remained low at £38.5m versus the market cap. of £2.9 billion so they therefore have significant capacity for future investment in land and work in progress.
On the outlook they suggest this remains positive and that the strength of their forward order book should enable the Group to achieve volume growth of up to 10% in the current financial year. Even with today's beat on current forecasts this would only put revenues up to around where current forecasts are, so unless analysts factor in another jump in operating margins, which seems unlikely from here, then I assume we will not see much in the way of upgrades.
Thus on valuation taking current forecasts for the coming year of 251.2 p earnings and 82.4p dividend this leaves them at last nights close of 2370p on around 9.5x with a 3.5% prospective yield which is 3 times covered by earnings. This seems to be the kind of rating that the market is happy to put on this stock so I probably wouldn't expect to see a dramatic re-rating from here, but returns are more likely to be driven buy the on going earnings and dividend growth. This looks like it will be in the region of 10% for now based on today's statement, but I guess there could be scope for upgrades through the year if their current guidance proves to be conservative.
Summary & Conclusion
Another set of forecast beating results from Bellway which comes as little surprise as they have done that quite a few times over the last few years and the housing market remains fairly firm on the back of supply and demand issues and on going government support.
Given their current guidance though it seems that we may not see upgrades but the market has nevertheless marked the shares up by around the extent of today's beat.
They seem to be sitting on their default rating of just under 10x with a 3 to 3.5% yield which the market has been happy to rate this one on in recent years. Thus future returns, absent a re-rating, should be driven by the on going 10% to perhaps 15% earnings and dividend growth which seems likely for the coming year. I guess some could be cautious on this one and the sector given the possibility of a rate raise at some point in the next year (how many years have we been saying that?) but I would not unduly worried about that.
So the shares look like a strong hold as long as you are not a bear on housing, and as in the last few years they seem as though they should be able to progress on the back of steady delivery of more houses, earnings and dividends. They also still Score 95 on the Compound Income Scores and as such are likely to remain in the Portfolio, while the Stockopedia Stock Ranks still has it at an 80, which is dragged down, somewhat surprisingly, by an average value score of 49.