I was surprised to see the Bellway (LSE: BWY) share price dip a little on Thursday after the company told us it expects to see housing revenue rise more than 8% to almost £3.2bn for the full year. That’s driven by an expected 5.7% rise in completions, from 10,307 in 2018 to 10,892 this year, hitting a record for the firm.
Pre-tax profit should be in line with market expectations, while Bellway’s operating margin should continue “to moderate towards a more normalised level.” There was net cash on the books of £201m at 31 July, up from £99m a year ago, and a forward order book of 4,878 homes shows no indication of any slowing in demand.
Growth and dividends
Chief executive Jason Honeyman reckons “Bellway is well placed to continue its long-term growth strategy,” and the markets seem to agree. Although the rapid earnings growth of recent years is inevitably slowing, there’s still a 3% rise on the cards for this year together with a predicted dividend of 5.1% that would be three-times covered. And that dividend is progressive, and will have almost doubled in five years if 2019 forecasts prove accurate.
With the shares on a forward P/E of well under seven, my big question is why investors aren’t rushing to fill their boots? The malaise that’s depressing the whole housebuilding sector continues to mystify me, and its afflicting the biggest companies too — even FTSE 100 giant Taylor Wimpey can command a P/E of only 7.7 these days.
Cooling in the property market, Brexit, and all that won’t change the fact that we’re deep in a chronic housing shortage. I still think the market has got the valuations of housebuilders badly wrong, and Bellway is on my buy list.
Disappointment
I was less impressed by what I saw in first-half results from TI Fluid Systems (LSE: TIFS) on Thursday, and the share price dropped 13% in response.
The company, operating in the unglamorous-sounding business of automotive fluid storage, carrying and delivery systems, reported a challenging global automotive market. That led to a 3.3% fall in revenue and an 18% drop in adjusted EPS. Adjusted free cash flow fell by 21.5%.
The firm said it expects its full-year adjusted EBIT margin to be anywhere from in line with or slightly weaker than the first-half figure, which came in at 10.1% (down from 11.4% at the same point last year). It added that free cash flow should come in behind 2018’s level.
That’s clearly disappointed investors who had been looking at forecasts for a 6% rise in full-year EPS and a 12% hike to the dividend, though the interim dividend was at least maintained at 3.02 cents per share.
Time to buy?
My thoughts now are that today’s share price fall could be an overreaction and might just have provided a nice buying opportunity. Prior to this first-half hiccup, TI Fluid Systems looked to be an attractive dividend stock, and I really don’t think much has changed.
Current forecasts suggest dividend yields of 4.3% this year followed by 4.6% next, and they’d be close to 3.5 times covered by earnings. That’s a pretty wide safety margin, and I don’t see any reason why short-term market toughness should require a cut.
My only concern is net debt, which has reached €854m. That’s 1.7 times annualised EBITDA, and for me that takes some of the shine off the low valuation.