Bellway Expects Higher Prices from Suppliers, Posts 41% Rise in FY16 Pretax Profit -- Update

(Updates with supplier pricing information and the impact of Brexit.)

By Olga Cotaga

LONDON--The fall in the British pound caused by the U.K. vote to leave the European Union has left home-builder Bellway PLC (BWY.LN) waiting for its suppliers to ask for higher prices on building materials.

"We expect similar issues to what Tesco PLC had with Unilever PLC," Chief Executive Ted Ayres said Tuesday, referring to last week's news that Unilever had insisted on a 10% price rise across its range of products, targeting customers including Tesco.

However, Mr. Ayres said he would negotiate on the rise in price. "There's no way we'll take on the initial price," he said.

Bellway buys most of its building materials, such as bricks and concrete, from major suppliers in the U.K., said Mr. Ayres. He named a few, like Wienerberger, which is an Austrian company but has two head offices and 14 factories in the U.K. Wienerberger wasn't immediately available for comment.

If the pound is weak, building materials and distribution companies find it more expensive to import materials into the U.K. and they might pass on the rise in input costs to their customers--the home-builders.

"Input costs are generally increasing as a result of currency moves," said Aynsley Lammin, Canaccord Genuity's home-building analyst. But Mr. Lammin said it would "present a challenge to pass on" the input costs "in a market that is expected to become more difficult."

Labor costs are something else about which Bellway was worried.

"There is still some upward pressure with regards to labour costs, particularly in the south-east [of England], where the availability of certain trades, predominantly ground workers, brick layers and scaffolders is most restricted," Bellway said.

The U.K. exit from the E.U. puts more pressure on labor costs, given that a considerable number of workers come from continental Europe and it is uncertain what will happen regarding their right to work in the U.K.

"We rely heavily on overseas labor," Mr. Ayres said. More than half of labor in London is from overseas, he added.

London accounted for 21% of Bellway's fiscal 2016 housing revenue and Mr. Ayres said he did not think the U.K. government would make decisions that would negatively impact European workers' rights in the U.K.

The Wall Street Journal has previously reported that U.K. Prime Minister Theresa May wanted to get British companies "the maximum freedom" to operate in Europe's single market, but not if it meant relinquishing the right to curb immigration to the U.K.

Bellway is a company with "sector-beating margins," according to UBS. Bellway reported Tuesday a 41% rise in fiscal 2016 pretax profit, beating analysts' expectations.

The company made a pretax profit of 497.9 million pounds ($634 million) for the 12 months ended July 31, more than the GBP354.2 million made in the previous year, after revenue grew 27% to GBP2.24 billion thanks to selling more homes at higher prices.

Canaccord had forecast a pretax profit of GBP493.5 million for the year. The broker recommended buying shares in Bellway, targeting a share price of 2,350 pence.

Bellway also raised its full-year dividend by 40% to 108 pence and said the total dividend was covered three times by earnings and that it expected to maintain that coverage.

The growth home-builder sold 8,721 homes in the year, 13% more than a year ago, at an average price of 252,793 pounds. Bellway's order book is of GBP1.12 billion and reservations, except cancellations, since June 24 rose 13% compared with the same period last year.

--Saabira Chaudhuri and Jenny Gross contributed to this article.

Write to Olga Cotaga at [e-mail], Twitter @OlgaCotaga

(END) Dow Jones Newswires

October 18, 2016 08:21 ET (12:21 GMT)

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