View the article online at http://citywire.co.uk/money/article/a571019
Smart Investor Tip: a bricks-and-mortar winner
Smart Investor reveals another housebuilder he thinks deserves a place in your portfolio.
In my formative investment years I would often attempt to time my purchases and sales to ‘dance in’ and ‘dance out’ of the market to enjoy a feast with bulls and an escape from the bears.
It worked, for a while. However, I soon learned that the phrase ‘where she’s going, nobody knows’ is a fairly accurate summation of a stock market’s movements.
Therefore, although I am aware that the FTSE 350 is not exactly low, I am still trying to find quality and value within the main market.
Safe as houses
Bellway (BWY.L) is the fourth biggest housebuilder in the UK, and is listed on the FTSE 250. Founded in 1946, it has provided more than 100,000 homes across the length and breadth of the UK. Bellway currently employs 1,400 people and, with a market capitalisation of £986 million, is the 206th biggest company listed on the FTSE 350.
As you may expect, the past five years have been rather tough for Bellway, and for the housing sector in general.
However, Bellway has managed to turn a net profit in four of those five years, with net profits falling from £166 million in 2007 to £27 million in 2008 before recording a net loss of £27 million in 2009. However, 2010 and 2011 have seen profits of £35 million and £50 million respectively, in spite of a very stale economy.
The above figures translate into an average return on equity (ROE) over the period of just 5%, and the figure hit 4.7% last year. These compare reasonably well with Persimmon’s 4% over a similar period, although both are well below what I would normally look for.
As for dividends, Bellway currently yields just 1.5%. This is unsurprising since its profits are lacking. As with Persimmon, the payout ratio is meagre at 30%, meaning management are adopting a prudent attitude towards the handling of profits, which is both understandable and wise.
Free cash flow, meanwhile, averages £46.5 million over the past five years, versus average net profit of £50.2 million, which is encouraging.
Focusing on the balance sheet, Bellway’s debt load is very light at just £100 million. This equates to a very low debt to equity ratio of 9.3% and, when cash is taken into account, the company only has net debt of £17 million. Interest cover of 10.4 provides further evidence that Bellway’s capital structure is reasonably sound.
With shares currently priced at 816p and Bellway having net assets per share of 888p, the price-to-book ratio is 0.92. This is attractive but the price-to-earnings (P/E) ratio looks a little high at 19.7. Thus, on the one hand shares appear to offer good value but, due to Bellway’s lack of profitability, the company could also be viewed as expensive.
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