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Bovis Homes - Fewer homes than expected

Nicholas Hyett | 28 December 2016 | A A A
Bovis Homes - Fewer homes than expected

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Vistry Group Plc Ordinary 50p

Sell: 864.50 | Buy: 866.50 | Change -8.00 (-0.92%)
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Shares in Bovis Homes fell 4% following a short pre-close statement this morning. The number of houses delivered in 2016 will be lower previous expectations, at between 3,950 and 4,000 homes.

Around 180 homes that were expected to complete in 2016 will be deferred into early 2017, with full year profit before tax expected to be between £160m and £170m.

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. This morning's announcement only adds to the confusion.

Completions are lower than expected, but the group is blaming slower progress on its construction sites rather than a fundamental change to the market, with prices expected to be around 10% above 2015 and sales rates ahead of last year. If the housing market as a whole were stuttering, we'd expect both transactions and prices to be taking a hit.

The Bank of England's decision to cut interest rates back in August should help to keep mortgages affordable, 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.

The group currently trades on 1.04 times its book value, and offers a prospective dividend yield of 5.7%, with the group "confident of delivering its plan for the final dividend of 2016" although of course there are no guarantees.

Pre-Close Statement

Total revenue for the year is expected to be in the region of £1.05bn, with operating margin slightly below that achieved last year.

Production is up 7% on the previous year, with 4,200 homes built in 2016. Average sales price of homes completing in 2016 is expected to be 10% above that achieved in 2015 (2015: £231,600), driven by a combination of improved mix and increased market prices.

The start of 2017 will see a greater number of homes under construction at the start of 2017 than 2016. The group has also secured detailed planning permission for all homes expected to complete in 2017, representing an improvement on the same point in 2016.

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 disclosure for more information.