Reporting today is a company that could record stunning share price growth over the next two years. It faces a somewhat uncertain future, but this appears to be reflected in its current valuation. Furthermore, it has a relatively high yield and could increase shareholder payouts at a brisk pace over the medium term. In addition, its business is performing well according to today’s update, with there being significant opportunity for more growth in 2017 and 2018.
Resilient performance
While there were predictions of a house price crash following the EU referendum in June 2016, today’s update from housebuilder Bellway (LSE: BWY) shows the market remains buoyant. It has reported a positive market backdrop in the last six months, with the average selling price of private completions up 4% to £291,000 versus the same period of the prior year. The company believes it will achieve at least this rate of growth for the full year, following investment in higher value locations in recent years.
Combined with a higher selling price has been a rising number of completions. They were 6.5% higher than in the first half of last year. More growth in this respect can be expected, since Bellway’s order book is valued 9% higher than it was last year. The company states that all divisions are performing well and while house price inflation has moderated, the sales prices achieved on reservations have been modestly ahead of expectations.
Growth potential
Looking ahead, Bellway’s forecasts are somewhat modest. It’s expected to record a rise in its bottom line of just 3% in the current year and next year. However, expectations for the UK housing market in general are relatively downbeat, since many investors anticipate a difficult period for the sector as the risks associated with Brexit take hold. However, since those predictions have mostly been wrong since the referendum, it would be unsurprising for Bellway and other housebuilders such as Persimmon (LSE: PSN) to report better-than-expected profit growth in 2017 and 2018.
Certainly, both stocks have the potential to rise by at least 20% during the next two years. In Bellway’s case, it trades on a price-to-earnings (P/E) ratio of just eight. This means it could rise by 20% and still have a single-digit P/E ratio. Similarly, Persimmon’s P/E ratio of 9.9 would remain undemanding even if its shares gained 20% by the end of 2018. And since Persimmon’s earnings forecasts are almost identical to those of Bellway, it could be argued that the latter has even more upside potential than its sector peer.
Of course, both stocks have high yields that could move considerably higher. Bellway’s yield of 4.2% is covered three times by profit, while Persimmon’s yield of 5.5% is covered 1.8 times by profit. As such, they both offer a potent mix of an attractive income and capital gain potential over the next two years. Now could be a good time to buy them, while investors remain somewhat lukewarm about the prospects for the housebuilding sector.
