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Bovis - Expecting higher profits and record revenues

Equity research team | 10 November 2016 | A A A
Bovis - Expecting higher profits and record revenues

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Vistry Group Plc Ordinary 50p

Sell: 1,201.50 | Buy: 1,202.50 | Change 6.50 (0.54%)
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Expecting higher profits and record revenues

A brief trading statement from Bovis confirms that the group remains on course to deliver higher profits and record revenues this year. Current trading is in line with normal trends after the disruption of the EU referendum. The shares moved 1.4% higher on the news in a strong wider market.

Our View

Like many other names in the sector, Bovis shares dropped sharply in the wake of the UK's vote to leave the European Union.

Data since has painted a confusing picture of the housing market to say the least. Mortgage approvals slumped in August and September, and house price growth has slowed dramatically. But so far housebuilders have continued to report strong sales and higher levels of interest versus a year previously.

If the housing market does stutter, it would likely mean fewer transactions and falling prices. Since builders' profits and cash flows are highly geared to house prices, a slowdown would not be welcome news for investors.

However, the decision by the Bank of England to cut interest rates should help to support mortgage affordability, and barring a major sterling crisis, rates could well stay low for the foreseeable future. In addition, the UK still faces a major housing shortage, and government continues to lend support to the sector.

As far as Bovis is concerned, some assurance can be drawn from a stronger balance sheet and an expanded land bank, providing some protection and flexibility should things slowdown. However, a failure to control cost inflation has meant that the group has struggled to grow margins in line with sector peers. That's an area where the group continue to see pressure.

With this in mind, and following the post-Brexit de-rating, the group trades on a forward price to book ratio of 1x, which is in line with its historic average. The prospective dividend yield of 5.8%.

Current trading in detail:

Bovis says that demand continues to run ahead of supply, and the group has closed more than the 28 new sales outlets that have been opened year to date. The group continues to increase its focus on high quality sites in the south of England, and since the half year stage has acquired 1,033 consented plots across nine sites.

Build activity is running at 5% above last year, but the group is finding that construction costs are continuing to rise.

Sales during the year have followed a normal seasonal pattern with the weekly private sales rate per site averaging 0.6 (2015: 0.59). The average sales price for 2016 is expected to be around 10% up on last year, driven by an improved mix and higher underlying prices.

David Ritchie, Chief Executive said:
"Housing market fundamentals remain supportive despite greater market uncertainty and we continue to manage the business through the cycle to deliver sustainable shareholder returns."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.