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Date: 26th September 2011 Bellway plc (LSE:BWY)

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Company: Bellway plc (LSE:BWY) Industry: One of the four largest house builders in the UK. Opinion: Shares are significantly undervalued. Intrinsic Value: 10.75 Current Share Price: 6.09 Market Cap: 736.54 million

REPORT SUMMARY: Bellway plc (LSE:BWY) is the fourth largest UK homebuilder by revenue after Taylor Wimpey, Persimmon and Barratts. The company was hardly hit by the financial crisis of 2008-2009, along with all the other house builders. It went through a large drop in sales and profits and had to employ some additional debt. However, Bellway has shown consistent strength and earning power throughout the 30 years of its listing in the London Stock Exchange. It has great economics, sound financials, and is well positioned to keep growing in the future. I believe the companys intrinsic business value to be significantly higher than Bellways current market price. BWY sold 4,500 homes in 2010 and has recently reported higher unit sales and home prices; Average selling price of a home is around 160,000; BWY has continuously generated profit margins of 15% and return on capital of 20%; Before the financial crisis, sales increased by 10%, and profits by around15% per year; BWY has consistently paid out dividends, even throughout the financial crisis; Historic dividend yield is 3%; BWY employs small amounts of debt compared to earnings and business value; Strong balance sheet; Strong management with long term service in the company; BWY sells at less than its net current asset value.

Float: 120.85 million Average Volume: 237,000 Financial Year End: 31st July Preliminary Results Announcement: 18th October Final Dividend Payment Date: 12th January Interim Results Announcement: 30th March -

The Investment Club 2011 I welcome your questions and feedback on mr.theinvestmentclub@gmail.com

COMPANY DESCRIPTION Bellway plc is among the four largest homebuilders in the United Kingdom (at the time of writing this report) and a FTSE 250 listed company. It was established more than 50 years ago and sells 4,000-6,000 homes every year with an average price of around 160,000. Bellway provides a range of house types covering apartments, terraced, semi-detached and detached homes, as well as affordable housing, and has sold 100,000 homes since the start of the company. It has regional offices all across the United Kingdom and currently employs 1,400 people. VALUATION Bellway plc is worth approximately 1,300m (10.75 per share), which means it is currently selling at around a 40% discount. This valuation is based on the calculation of intrinsic worth of the company by analysing a number of business fundamentals. I say approximately because intrinsic value is impossible to judge with precision. However, I consider this number to be a good estimation of what the underlying business is worth. Bellway is an established company in the UK home building market and has some of the best economics in the industry. It has consistent earning power, great margins and a sound balance sheet to show for. The company carries very little debt compared to business value and earnings and has repeatedly shown the ability to create free cash flow. Bellway generates 15% profit margins and return on capital of about 20% per year. The company has consistently paid out dividends, even throughout the financial crisis. Current dividend yield is about 1%; historic dividend yield is 3%. Bellway maintained strong revenues and earnings throughout the 2008-2009 financial crisis. Problems in the housing market affected all builders and Bellway certainly wasnt an exception. Revenues declined 40% compared to 2007 highs, and the company is currently selling about 2,500 homes fewer than it did before the crisis. But the industry in general is no different. Bellway was hurt by a major change in market conditions and the decline in profitability has been largely out of its control. I believe the markets will improve, even though I cannot say when, and Bellway is one of the bestpositioned companies in the industry to take advantage of the changes when they happen. Bellway should be able to sell more houses at better prices in the future. MANAGEMENT Bellways Chief Executive John K Watson joined the company in 1978 and has been in his current role for the last 12 years. The Board Chairman is Howard C Dawe who has been with Bellway for 50 years and previously served in the company as Group Chief Executive. Most of the board members have themselves significant shareholdings in the company. Bellway has been listed for over 30 years and throughout, the management has improved earnings whilst employing a reasonable amount of additional capital. There seems to be a real focus on creating shareholder value among the companys management. MARKET SENTIMENT There is a growing sentiment that UK housing market is improving. Bellway has reported increasing unit sales and higher prices, and so have other homebuilders. Most analysts consider Bellway to be a strong high quality builder and yet regard its competitors to have more upside potential. The company has a smaller and a more stable business, meaning it does not often appear in the media. This would explain the comparatively low market price of Bellways shares. The company has stronger financials than most of its competitors, making Bellway significantly undervalued. RISKS AND CONCERNS A major fall in sales is probably the biggest threat to Bellway, as it would have a negative impact on companys cash flow. However, Bellway has always managed to maintain a good cash position, even during market declines, and there is little reason to believe this would change in the future. Also, Bellway is already reporting higher unit and sales. The housing market in the UK seems to be recovering but is still fragile, and both builders and buyers remain cautious. There is continued concern regarding mortgage availability, especially for first-time buyers. The number of mortgage approvals is still very low compared to pre-crisis levels. Longer-term concerns are the availability of suitable land for development, and stricter planning laws. Some consider house prices in the UK to be too high (often compared to prices in the US) and predict a dramatic collapse in our real estate market. I do not know what is or is not going to happen with housing worldwide. However, the nature of the UK market is slightly different from the US. We have less space, stricter planning laws, and home building more closely tracks population growth. Recently, there have been increased concerns about the lack of space and affordable housing in the UK. Unfortunately, these are the kind of issues that are not going to go away overnight, and will most likely keep the prices stable, or growing for years to come. This in turn is likely to offer continued development opportunities for house builders.
The Investment Club 2011 I welcome your questions and feedback on mr.theinvestmentclub@gmail.com