Bellway's discount to sector unwarranted, 'buy' says UBS

27th Mar 2014 12:37

UBS has lifted its target price for housebuilder Bellway and maintained a 'buy' rating, saying that the valuation discount to others in the sector is too wide.The target for the shares has been raised from 1,930p to 2,030p."Bellway trades on an 18% discount to the sector on a price-to-tangible net asset value basis and an 8% discount to the sector on a price-to-earnings basis," said analysts Gregor Kuglitsch and Elliott Miley. "We think this discount is unwarranted given: 1) lower risk profile with no debt and limited use of land creditors and trade payables; 2) strong track record over the cycle which Bellway weathered better than most peers."The analysts said that Bellway's first-half figures on Thursday showed a strong operating performance, particularly with margins up a "robust" 280 basis points to 15.6%. As a result, the return on capital employed (ROCE) improved strongly by 6.6 percentage points to 17%, they highlighted.UBS has now increased its earnings per share forecasts for the next two years by 7% and 8%, respectively, after Bellway's new margin guidance of 16-17% for the 12 months ending September 2014. The bank is now 10% and 19% ahead of consensus forecasts for this year and the next, respectively."We forecast pre-tax ROCE of 19% for the 2015 calendar year, which is slightly below the sector average of 21.5%. However, we note Bellway is generally a lower user of land creditors and trade creditors, implying the embedded balance sheet risk is lower than peers."The stock was down 0.6% at 1,627p by 12:47 on Thursday, pulling back after a 3% gain the previous session.BC