View from City Road: Bellway builds a solid base

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BELLWAY has to be admired for its audacity. Less than two years after asking shareholders for pounds 25m to finance the purchase of housing land, it has come back to the market seeking pounds 36m through a two- for-seven rights issue - and this despite having pounds 16m cash in the bank.

Bellway is fortunate. Its shares, down 2p to 394p yesterday, have outperformed the market by more than 30 per cent - and the sector by more than two and a half times - since its last cash call and, at 320p, the current issue is priced 100p higher than the last one. More importantly, it has done everything it said it would. It has spent pounds 60m buying land, helping it to increase house sales from 1,518 in 1991 to an estimated 2,200 in the year to July. It plans to increase that to 4,000 a year. It is forecasting profits before tax of pounds 16m, compared with pounds 9.3m in 1991, and a dividend at least maintained at 11.5p.

That puts it on about 19 times this year's earnings and a yield of 4 per cent - below rivals like Persimmon, Berkeley Group and Wilson Bowden. Shareholders who shunned the last rights issue, which was only 52.3 per cent subscribed, should be wary of missing out this time around.

That underlines a paradox in the sector: those that least need the money will find it easiest to raise. The balance sheets of many of Bellway's larger peers - including Tarmac, Taylor Woodrow and Costain - are severely stretched, but they would find it difficult to raise capital.

That is partly because investors were badly burned in the 1991 cash-call flood. Of 15 larger issues made then, the shares of only three are now above the rights prices; three are less than half; four are less than a third. Many have cut their dividends, and some need to do so again, so yields are insufficiently attractive to justify the risk.

The example of Tarmac - which has not had a rights - illustrates the problem. To halve its debt it would need pounds 300m, which would mean increasing its capital by 45 per cent if it priced the issue at a 20 per cent discount. It would need to make pounds 105m profit to cover the current level of dividend just once - and that is not likely until 1995.

That does not mean there will be no more rights from the sector; it does mean they are likely to be delayed until the recovery is well under way.