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Smart Investor Tip: a bricks-and-mortar winner

Smart Investor reveals another housebuilder he thinks deserves a place in your portfolio.

 
Smart Investor Tip: a bricks-and-mortar winner

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

After a decent performance since I recommended Persimmon (PSN.L) in January (one for your long-term portfolio), I am returning to the housebuilding sector for my latest recommendation.

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.

Performance

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.

Dividend yield

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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8 comments so far. Why not have your say?

joe stalin

Mar 05, 2012 at 09:03

Seems very much on the one hand and then on the other to me. I also think that the last comment can be applied to the entire housebuilding sector. Every time indications are even remotely positive hoardes of doomsayers do their best to dampen sentiment for their own ends.As houses and the value of one's house are important to just about anyone who owns one clearly price trends are watched keenly. Without fail house builders have seen a bottoming out in sentiment and seem guardedly optimitic about future prospects borne out by the fact that dividends have been re introduced. While the arguments wrt Bellway are soundly put iwould suggest the upside in many other buiders is greater. I would point out Galliford and Taylor wimpey but also Persimmon given their stated cash return objectives.

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Alan Tonks

Mar 05, 2012 at 10:34

joe stalin

You certainly have the right name not doomsayers as you put it, but people that can see without blinkers.

It goes without saying that the whole housing market is propped up by this Government. Without their intervention the whole housing market would collapse easier than a pack of cards.

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Alan Tonks

Mar 05, 2012 at 10:35

joe stalin

You certainly have the right name not doomsayers as you put it, but people that can see without blinkers.

It goes without saying that the whole housing market is propped up by this Government. Without their intervention the whole housing market would collapse easier than a pack of cards.

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jamie banks

Mar 05, 2012 at 10:37

dick what planet do you live on

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jamie banks

Mar 05, 2012 at 10:39

i was refering to writer of original storey not the other people who have commented who make more sense than "smart" investor

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Anonymous 1 needed this 'off the record'

Mar 05, 2012 at 11:56

Struggling for something to write about I would say....

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Roger Savage

Mar 06, 2012 at 01:48

Couldn't agree more Alan - we have FirstBuy, NewBuy and record low interest rates. The property market should be rebranded the prop market.

Still, at least the housebuilders are getting some value from their party donations and lobbying, even if the taxpayer gets shafted...

I bet the slimy government of today will be directors of housebuilders tomorrow. Ch-ching...

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kenneth douglas

Mar 12, 2012 at 11:12

Smart Investor, this is the same article as last week, pushing the same companies. Try Gilliford, could be added to your list.

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