Despite concerns about slowing UK economic growth, housebuilder Bellway (LSE: BWY) delivered yet another upbeat trading update today so if you’re stalking the market to hunt down prizes for your portfolio, it might be worth checking out.
Strong demand
The Newcastle-based business said this morning that it expects housing revenue for the year to increase by over 13% to £2.5bn, amid continued strong customer demand which has been underpinned by the Help to Buy initiative and the ongoing availability of cost effective mortgage finance. The average selling price of homes sold rose by 2.9% to a record £260,000, while the number of housing completions grew by 10.6% to 9,644.
These figures place Bellway in the top quartile of the housebuilding sector in terms of growth. And looking ahead, it is well placed to continue its recent outperformance as it has significant capacity for further volume growth, which is supported by its strong balance sheet and its operational ability to open new divisions in areas of strong demand.
Admittedly, the cyclical nature of the housebuilding sector means investors will always worry about the next property downturn. And although recent surveys have suggested slowing house price growth in the UK market, I remain confident about the sector’s prospects given high employment levels and the chronic shortage of affordable new homes.
At current levels, I reckon shares in Bellway are trading far too cheaply right now. The housebuilder trades at just eight times its expected earnings next year, against the sector average of 14.9. What’s more, there’s also plenty for income hunters to get excited about too, with shares forecast to yield 3.8% this year.
Cost inflation
Meanwhile, things aren’t exactly smooth sailing for construction materials supplier SIG (LSE: SHI). Underlying operating profits in the six months to 30 June fell by 16.1% to £45.7m amid continuing competitive market conditions and cost inflation pressures in the UK.
Although SIG has raised prices in response to higher raw material costs, demand for insulation and interior products in the UK remained relatively soft, putting pressure on its top-line growth. In addition, the impact on its bottom-line was only partially offset by a modest improvement in gross margins, which rose from 22.9% in second half of last year, to 24.5%.
Looking ahead, SIG remains concerned about continued macroeconomic uncertainty in the UK, although this may partly be mitigated by continuing improvement in confidence in its mainland European markets. In the first-half, underlying profits there rose by 2.1%, which compared favourably to the 21.7% decline from the UK and Ireland.
In this tricky environment, the City expects SIG’s underlying earnings per share to slip 1% for the full-year, although clearly this estimate is in danger of being downgraded should market conditions indeed remain challenging. Fortunately, the situation is expected to improve for the coming year, as analysts are currently pencilling in an 11% earnings improvement, to 10.64p, for 2018.
Trading at a forecast valuation of 14.8 times its expected 2018 earnings, SIG looks reasonably priced. What’s more, its forecast yield of 2.4%, which is backed by 2.8 times earnings, adds to the investment appeal of the stock.
