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Bovis - Turnaround laying foundations for recovery

Nicholas Hyett | 14 November 2017 | A A A
Bovis - Turnaround laying foundations for recovery

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Vistry Group Plc Ordinary 50p

Sell: 1,202.50 | Buy: 1,203.50 | Change 7.50 (0.63%)
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Shares were up 1.6% after third quarter results showed a small improvement in operating performance.

However, the focus of the release was progress in the ongoing turnaround and restructuring program.

Our View

Bovis has struggled to keep build costs under control in recent years, and 2016 saw profits fall and completions come in below anticipated levels. Unfortunately, many of the homes it did deliver fell short of the standards expected.

The new CEO, Greg Fitzgerald, has an excellent reputation within the industry, but has a lot to do to get the business back on an even keel.

His strategy calls for scaling back the grander ambitions from yesteryear and prioritising Bovis' core operations, but we it's a sensible decision. The fact his plans to slim down the group have the potential to yield some chunky special dividends is a useful bonus.

Bovis continues to lag competitors, but early signs are good. Customer satisfaction, sales rates and pricing have all improved - despite major initiatives, such as new line up of house types, being still in development.

Efforts to strengthen the balance sheet also seem to be showing early signs of success. The group expects to finish the year with almost three times as much net cash as in 2016.

If Fitzgerald can keep 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. With the shares trading on a price-to-book ratio well below many others in the sector, the group could be an attractive recovery play.

Bovis currently trades on an improbably high prospective yield of 8.2% for 2018. However, the new CEO's plan to instil a culture of 'getting it right first time' is surprisingly apt. Favourable conditions in the sector won't last forever and if investors are to reap the rewards of a successful turnaround, the new CEO needs to get Bovis' house in order pretty sharpish.

Third Quarter Results

The average sales rate over the period rose to 0.52 (H1: 0.48). Prices continued to rise, reflecting changes in mix as well as a modest increase in underlying prices.

Customer satisfaction on completions since 1 February has improved significantly, and now stands at 75%, equivalent to a 3-star rating. The group remains confident on achieving its medium term target of a 4-star rating.

The company is on course to achieve its target of overheads being 5% of revenue from next year, and expects to take an exceptional restructuring charge of around £4m in the second half. Product development continues, with Bovis expecting to offer 22 new house types from next year.

Management expect to finish the year with net cash £100m after significant efforts to strengthen the balance sheet.

The group has completed the disposal of its shared equity portfolio for £21.9m, and has made two land disposals worth a total of £12.9m. Further reductions are expected as it targets a land bank equivalent to 3.5-4 years of production.

Bovis is targeting a minimum of £180m in additional cash flow into the business by the end of 2018.

The board is confident of delivering profits in-line with expectations in 2017, with a significant improvement in 2018.

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.