British Home Builder Bellway Trading Cheaply With Brexit Concerns

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- By Holmes Osborne, CFA

Bellway PLC (BLWYY) (BLWYF) (BWY.L) is a British home builder that is trading at a very nice valuation. Along with the other U.K. home builders, the company is trading cheaply with concerns about Brexit and the U.K. housing boom that may come to an end.

The stock trades for 30.34 British pounds ($39.22), there are 122.8 million shares and the market cap is 3.725 billion pounds. The earnings per share are 3.43 pounds and the price- earnings (P/E) ratio is 8.8. The dividend is 1.12 pounds and the dividend yield is 3.67%. Pretty decent valuation. The company's net asset value has grown at 21% a year for the last four years.


According to the Financial Times, gross margins are 26% and the profit margins are 18.29%. Return on equity is 22.96% and return on investment is 21.97%. Very profitable.

Sales grew from 1.45 billion pounds in 2014 to 2.241 billion pounds in 2016. Earnings per share grew from 1.57 pounds to 3.29 pounds over that time frame. Great growth. Free cash flow was 159.63 million pounds last year and the free cash flow yield is 4.3%. The balance sheet shows 59 million pounds in cash and 76 million pounds in receivables. The liability side shows 216 million pounds in payables and 33 million pounds in debt. Very strong balance sheet.

The order book for housing this year is 5,819 homes. There are 10,250 plots contracted. So far, the housing market in Britain remains quite strong. The average home sold costs 256,140 pounds. Profits have been strong with a housing shortage in the U.K. and a government program to buy housing.

Here is a link to condos at Canary Wharf in London that Bellway is selling. They sell for between 650,000 pounds and 950,000 pounds. Here are some nice homes in Birmingham that sell for only a few hundred thousand pounds. You can custom design your own home and add granite counter tops, wine coolers, fireplaces and many more amenities. If you own at least 2,000 shares of stock, you can receive a discount on a home from between 2,000 pounds and 25,000 pounds. That is pretty cool.

I got the idea from the Pear Tree Polaris Foreign Value Fund. The fund also owns Persimmon PLC (PSN.L) and Taylor Wimpey PLC (LSE:TW.). You can tell management thinks British housing builders are oversold. They might be right. It seems the market is anticipating a pullback in housing. In an article from the Motley Fool U.K., the author wonders if things will get worse with Brexit. I cannot answer that question.

According to a recent article in Bloomberg, "Homebuilder shares are heading for a pullback in June that would mark the index's first monthly decline since November. Sentiment in the past 12 months has been helped by strong home completions and rising profit at firms including Redrow Plc (RDW.L), Taylor Wimpey Plc and Persimmon Plc, leading some to speculate that concerns of a major slowdown were overblown."

Before recently, I had never heard of Bellway. It is a great company in a cyclical industry. If you are a bottom-up value investor, it makes sense. Personally, I do not know which way the U.K. housing market is going to go, so I am going to stay away. With a market cap close to $5 billion, you should at least know about the company.

Disclosure: We do not own shares.

This article first appeared on GuruFocus.


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