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Bovis - First half trading as expected, but provisions rise

George Salmon | 6 July 2017 | A A A
Bovis - First half trading as expected, but provisions rise

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Vistry Group Plc Ordinary 50p

Sell: 1,164.00 | Buy: 1,165.50 | Change -36.50 (-3.04%)
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In a brief trading update ahead of half year results (due on 7 September) Bovis has confirmed trading over the first 6 months has been in line with the expectations set out in February. The shares were little moved on the news.

Our view

There are plenty of challenges facing Greg Fitzgerald, Bovis' new CEO.

The group has long been struggling to control build cost inflation, and last year saw profits fall and completions come in below anticipated levels. Many of the homes it did deliver fell short of the standards expected. A total of £10.5m has now been set aside to cover the costs, which include customer redress.

However, Bovis' difficulties are symptomatic of internal, rather than sector-wide, issues. Despite lingering uncertainty over the future of the UK's economy, there are plenty of factors supporting the UK's housebuilders. The country still faces a major housing shortage and government schemes such as Help to Buy continue to assist first-time buyers. In addition, low interest rates are helping to keep mortgages affordable.

With the other builders increasingly exuding an air of confidence, and Bovis lacking direction, it was perhaps unsurprising that a couple of others saw the potential to merge and try to engineer an improvement. Both Redrow and Galliford Try tested the water, but Bovis rejected both approaches, and have since appointed a new CEO.

The new man, Greg Fitzgerald, has an excellent reputation in the industry, so the board will certainly be pleased to have tempted him out of retirement. We'll have to wait until September to see what his longer term plans are, but for now he is prioritising righting previous wrongs, and improving both the build process and customer service levels. We feel this is a sensible place to start.

The shares could be thought of as an attractive recovery play, after all its price to book ratio is well below others in the sector. However, the favourable conditions supporting the sector won't last forever. For investors to reap the rewards, the new CEO might not only need to get Bovis' house in order, he might need to do it quickly too.

First half trading update

Average selling prices rose 9% over the period, driven by a more favourable sales mix and a modest increase in average underlying prices. However, as previously noted, profitability in the half will be impacted by higher build costs and lower levels of production.

Bovis says it has taken a more 'controlled' approach at many sites. 1,512 (2016: 1,601) completions were delivered over the first half, down from 1,601 at this time last year. The group continues to expect volumes for the year as a whole to be c.10-15% below 2016 levels.

The group is focusing on improving service levels, and has invested in customer service training for the majority of its employees. While the group has added another £;3.5m provision on top of the £7m set aside in February in relation to quality and service issues, it says the homes delivered in the first half have been finished to the high standard expected.

In the land market, the group continues to see opportunities that exceed its required returns. 2,337 plots were added to its bank of land with planning permission in the period. Excluding the 821 plots added to its site in Wellingborough, 62% of these additions were sourced from land that was already owned, but did not previously have planning permission.

Greg Fitzgerald, group CEO said: "We continue to identify and implement operational improvements and I am very confident we can deliver a successful turnaround, returning Bovis Homes to being a leading UK housebuilder. I look forward to providing an update on strategy with our half year results in September."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.