BEA Formative Write-Up

8/7/2019 BEA Formative Write-Up

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i) Introduction

In economically unstable times such as those we are facing now, the housing market is likely to

experience difficulties. Within this work, we aim to compare two different English based housing

providers of similar size and stature, in an attempt to investigate how they have coped with the

recent strains (REF ME).

ii) Bellway Summary

Bellway Plc. is one of the United Kingdoms largest home providers, in 2009 ranked the countrys 4th

largest homebuilder. Based in Newcastle, Bellway was founded in 1946, and floated on the London

Stock Exchange in 1961. Despite the headquarters being based in Newcastle, the organisation

operates in a decentralised manner (REF ME), having a significant impact upon its financials.

Through defining itself as the Local, National Housebuilder (REF ME), the company operates its

highest level corporate strategy out of Newcastle. However, a large proportion of the decisions are

made independently by one of the companys 14 different regions. This impacts the financials,

because through making different decisions with regards to suppliers and purchasing of land, if there

is an issue with a supplier, this should not affect the other regions, thus allowing each of thedifferent regions to offset each other.

iii) Berkeley Group Summary

The Berkeley Group Holdings Plc was founded in 1976, like Bellway Plc as a United Kingdom based

home provider. The organisation suggests within its values (REF ME), that they attempt to add value

through its development expertise. They suggest that they do not worry about reporting periods

and are instead more interested in attaining value over the long term, through taking low financial

risk, and only using Gearing when it is desperately necessary. In a different mechanism to Bellway,

the Berkeley Group are again split up. This time rather than geographically however, they are split

up into several different brands that are used to perform different functions (REF ME).

iv) Exceptional Items

Prior to 2007, the housing market was experiencing a boom period, as mortgages were being

provided at levels far superior than they are now (REF ME). Whereas in the past, people were trying

to buy houses as soon as possible, people are now less willing to buy, out of concern that the market

may soon crash (REF ME). This in addition to the fact that mortgages are now more difficult to

obtain, and that people have less disposable income (REF ME) has meant that demand has fallen,

driving prices down. This is represented in the exceptional items of Bellway, who in 2008 had to

write-down the value of their inventory by 112.5 million, having acknowledged in their Annual

Report that the housing revenue due to pricing changes would fall by approximately 12.5%. In 2009,

the write-down was only 58.9 million, significantly less, due to the fact that in the second half of

the financial year the market slightly stabilised, but was still fragile.

Despite not being part of the exceptional items, it seems important to note now, that the Berkeley

Group acknowledge in the 2007 Annual Report that due to the lack of liquidity available to them at

present, they agreed with shareholders that dividends would not be paid until 2013, as in order to

survive, the company has placed importance on the buying up of more land using this capital. In

order to compensate the shareholders for this, it has been suggested that upon resumption, the


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dividend payments will be above average for the industry, and remain that way for a number of

years (REF ME).

v) Analysis

When comparing Bellway and Berkeley, one of the first things that becomes obvious is the

difference in the liquidity ratios between the two companies. It is suggested that the best value forthis current ratio is that of 2:1, Berkeley despite the financial difficulties in the last 2 years have been

able to maintain their ratio around this level. Bellway on the other hand, have struggled more. The

fact that the current ratio includes the inventory in the assets aids in the explanation of this. The

Annual Reports for Bellway in 2008 and 2009, show a fall in housing sales of 14.2% and 33%

respectively. Such a fall means that the inventory that Bellway has will have grown, thus increasing

the ratio. It is important to note though, that using the Acid Test ratio, excluding the inventory, both

the organisations fall short of the suggested 1:1 ratio. Both have a very similar value, approximately

half of that required, in 2008. However, in 2009 the ratio for the Berkeley Group improves a small

amount to 0.52:1, whilst that of Bellway falls to 0.39:1. It is possible that this is partially due to the

fact that Berkeley are not paying any dividend payments (Bellway paid out 10.4million in dividends

in 2009, whilst the Berkeley Group did not pay any).

Bellway '09 Bellway '08 Berkeley '09 Berkeley '08

Current Ratio 5.306410397 4.950252448 2.104299904 2.154729934

Acid Test Ratio 0.385160087 0.486222956 0.515429737 0.498826577

Op. cash flows to mat.

Obligations

0.783938053 -0.226695676 0.106050778 0.43271236

Figure 1 A table showing the Liquidity Ratios for both companies in 2008 and 2009.

With regards to the profitability, the most important ratio to compare appears to be that of Net

Profit Ratio (NPR) (REF ME). It is obvious that the Berkeley Group has a NPR far higher than Bellway

that remains consistent throughout both of the years in question at a value just exceeding 18, whilst

the value for Bellway falls from 5 to -2.3. The most obvious explanation for this again stems from

the fact that the number of Bellway houses sold fell so significantly from 2008 to 2009. It is

important to note also, that this number is calculated prior to the removal of the exceptional items

(REF ME), and whilst Bellway has a total exceptional items value of 66.3 million, the Berkeley Group

does not list any exceptional items for that year. In fact, the NPR for Bellway, although still

significantly less than that of the Berkeley Group, is positive once these items have been removed. It

is this Net Profit that the dividend payments are drawn from, therefore the fact that the Berkeley

Group have such a strong value, in tandem with not paying out dividends upon the shares suggests

that it is in a very strong profitability position.


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Gross Profit Ratio 3.044838282 9.820528367 27.03773588 28.45389865

Net Profit Ratio -2.31627653 4.997298922 18.76408859 18.46076287

Return on Capital

Employed-2.50893975 8.428825243 13.65589946 16.78574982

Figure 2 A table showing the Profitability Ratios for both companies in 2008 and 2009.

In terms of stability, the Berkeley Group acknowledge in their Annual Report that they aim to avoid

having to borrow money unless desperately necessary, instead attempting to use other methods

(e.g. cutting back on dividend payments). This is highlighted when looking at the companies gearing

ratio at a level of only 0.06 in 2008 and 0.08 in 2009. The Bellway levels are not much worse for

2009, being 0.13, although in 2008 they were at 0.26. This significant reduction may have an impact

on some of the other financial indicators, as this is quite a large amount of debt to have paid off overthe course of only 1 year. The fact that the Berkeley Group have such a low gearing ratio

consistently, also suggests that in the Long Run they may be more competitive.


Gearing (Leverage) 0.125669624 0.263913877 0.085984498 0.067017211

Interest Cover -1.0013276 3.015221499 -26.341775 36.43338954

Figure 3 A table showing the Stability Ratios for both companies in 2008 and 2009.

Due to the lack of dividend payments from the Berkeley Group, it is difficult to successfully use the

investment ratios in a large scale comparison. However, there are some factors that should be

noted. Firstly, were the Berkeley Group to have been paying dividends during this period, it is likely

that they may have born some relation to the earnings per share (EPS) at the time. If this is indeed

the case, then the Berkeley Group would in theory be able to pay out dividends far greater than that

of Bellway as their EPS is over double Bellways. It is important to note however, that this is only

speculation and that there are likely to be a large number of other factors that will also impact upon

the dividend value. With regards to the share value itself, the table below clearly shows that

between 2008 and 2009 the share price nose dived, however this is a trend throughout the marketduring this period, although possibly not to quite the same extent (REF ME). It is also important to

have a look at the Price Earning Ratio which takes into account both the EPS and the market value

for the share (REF ME). Despite Bellway having a higher value in 2008 than that of Berkeley, again it

falls drastically in 2009, whilst the Berkeley Group stays consistent throughout. The P/E ratio can be

used as a proxy for the prediction of future earnings growth (REF ME). Therefore, despite the values

being higher in 2008 for Bellway, the consistency of the Berkeley Group may be more of a relevant

factor.


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Earnings per Share -0.23874752 0.235596076 0.658581797 0.713745068

Dividend per Share 9.001314077 44.76351622 0 0

Dividend Cover -0.02652363 0.005263127

Dividend Yield Ratio 1.333528011 8.28954004 0 0

Share Price 750 600 1030 1238

Price Earning Ratio -3141.39383 2546.731719 1563.9667 1734.51286

Figure 4 A table showing the Investment Ratios for both companies in 2008 and 2009.

vi) Limitations

It is important to realise, that there are a number of limitations to this report that mean although it

is useful, it cannot be used as the sole basis for an investment decision. Firstly, the report only

compares two companies. Although this gives an indication of how Bellway is performing when

compared with the Berkeley Group, it does not take into account the whole industry and there is a

possibility that either Bellway or Berkeley could be an exception to the industry norm. On top of

this, the report is also based mainly upon ratios, which although useful also have their own issues,

the most important of which is that they are based upon past ratios. Although we can therefore

investigate what occurred in the past, it is impossible to tell what is going to occur in the future from

this. Therefore any decision making that occurs is based on prediction rather than fact.

vii) Conclusions

To conclude, even taking into account the fact that the Berkeley Group are not paying dividends if

you were to decide between the two companies, it appears that the Berkeley Group would be the

best company to invest in. Not only in the future will the dividend be higher than that of the

industry average, the company is also stronger both with regards to stability and profitability than

Bellway. It is though important to realise, that in these financially difficult times, the housing

industry has been hit harder than most, and thus advice for those thinking of investing should be to,

for now, steer clear of this industry.

Documents

BEA Formative Write-Up