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Bovis Homes - Operational issues 'very fixable'

George Salmon | 7 September 2017 | A A A
Bovis Homes - Operational issues 'very fixable'

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Bovis Homes Group plc Ordinary 50p

Sell: 1,137.50 | Buy: 1,140.50 | Change 8.00 (0.71%)
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Despite a 4% increase in revenue, driven by a 9% increase in average selling prices, the cost of customer redress, higher investment and rising build costs meant Bovis' half year operating profit fell 28% to £45.8m. The interim dividend remains unchanged at 15p per share.

However, the main focus was the group's strategic review. Bovis' new CEO Greg Fitzgerald says that good progress is already being made in turning the business around, and he is confident the operational issues facing the business are all 'very fixable'. The shares rose 5.2% on the news.

Strategic update

Bovis has encountered numerous problems in recent times. As Mr Fitzgerald put it, it has seen "a decline in build and customer service standards, an underinvestment in people and infrastructure, processes becoming overly complicated, and a lack of hands on management."

His plans to fix these issues include increasing investment in staff training to improve customer service and create a culture of 'getting it right first time'. Rather than 8 offices, the group will operate from 7 locations, and will be targeting around 4,000 completions per year.

A number of sites outside the group's core geographic areas will be sold, generating between £80m and £100m. Together with other actions, such as the sale and leaseback of show homes, this is set to free up a minimum of £180m additional cash, which the group plans to returns to shareholders in special dividends by 2020.

Also by that time, Bovis is hoping to achieve a gross margin of 23.5% and a return on capital employed of 25%. Last year, gross profit margin was 19.8% and ROCE was 17%.

While the interim dividend is held flat, the group plans to raise the total 2017 payment to 47.5p, which would imply an 8% increase in the final dividend later this year. Bovis then plans to raise the 2018 payment by 20%, to 57p per share. Of course, where dividends are concerned, investors should remember there are no guarantees.

Our view

In recent years, Bovis has struggled to control build cost inflation, and last year saw profits fall and completions come in below anticipated levels. Unfortunately, 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. It was in this context that David Ritchie, who had headed the group for 8 years, departed.

The new man, Greg Fitzgerald, has a lot of work ahead of him, but does have an excellent reputation within the industry. His strategy might mean scaling back from the grander ambitions of yesteryear, but we feel he's right to prioritise getting Bovis' core operations back on track over further expansion. The fact that his plans to slim down the group have the potential to yield some pretty chunky special dividends in the next few years is useful bonus too.

If Mr Fitzgerald can get the ship facing in the right direction, the combination of low interest rates and supportive government policies, such as Help to Buy, should mean there is some wind in the sails straightaway. With the shares trading on a price-to-book ratio well below many others in the sector, the group could be thought of as an attractive recovery play.

However, it seems fairly apt that the new CEO's plans include instilling a culture of 'getting it right first time'. These favourable conditions won't last forever. For investors to reap the rewards of a successful turnaround, the new CEO might not only need to get Bovis' house in order, he might need to do it quickly too.

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