Bottom Line: Worries justified

A RISE of 73 per cent in first half pre-tax profits to pounds 10m provided some welcome relief for Bellway's shares.

But yesterday's 11p rise to 249p clawed back only a fraction of their 20 per cent fall since peaking in February, worse than the out- of-favour building sector.

That might seem harsh in the light of a 45 per cent increase in homes sold to 1,212, a 28 per cent rise in operating margins to 11.4 per cent and a 10 per cent jump in the interim dividend to 2.2p.

But the market's recent worries were fully justified by Bellway's decision to scale back land acquisitions until it becomes clear whether high prices are a temporary blip or here to stay.

If the latter is true, and labour costs also rise by the 10 per cent that some analysts are forecasting this year, the whole industry's margins are in trouble.

Bellway plans to double unit sales to 4,000 a year while keeping a three-and-a-half-year land bank - something that will be increasingly difficult to achieve at a decent margin.

That is partly reflected in an annualised P/E for 1995 of 11, less demanding than most of Bellway's peers. But, without the house price inflation presumed by the optimistic land-buyers, even that will prove too high when the market rightly begins to demand a discount.