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Bovis Homes - Significant step up in profitability

Nicholas Hyett | 5 July 2018 | A A A
Bovis Homes - Significant step up in profitability

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Vistry Group Plc Ordinary 50p

Sell: 1,236.00 | Buy: 1,237.00 | Change 5.50 (0.44%)
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First half completion rose 4.5% to 1,580, driven by growth in affordable homes, with average sales prices slightly lower as a result. Bovis continues to make progress on quality and customer service, while sales rates are improving.

CEO Greg Fitzgerald expects the group "to deliver a significant step up in profitability for the half year".

The shares were broadly flat in early trading.

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Our view

While other builders were riding high, boosted by a combination of low interest rates and supportive policies such as Help to Buy, Bovis struggled. Problems with build cost inflation were paired with a drop in completions and a notable deterioration in build quality.

After losing its CEO in January 2017, a couple of opportunistic bids from Redrow and Galliford Try were rejected, and industry veteran Greg Fitzgerald was appointed to lead the turnaround. At the time we felt this was a good appointment, but his in-tray would have been rather full when he sat down at his new desk.

His strategy of scaling back the grander ambitions from yesteryear and prioritising Bovis' core operations is the right one in our opinion. Early results have been promising.

Customer satisfaction and pricing have improved. Efforts to strengthen the balance sheet are showing signs of success, and slimming down through asset sales gives the group the potential to pay out some chunky special dividends.

The shares offer a chunky prospective yield of 9.2%. That suggests there may be some upside in the share price if all goes to plan, but worries about the wider housing market have seen the shares come off a bit in recent weeks.

Conditions don't get much more favourable in the housing market than they are at present, and the twin tailwinds of favourable economic conditions and supportive government policy can't blow forever. In fact conditions in the wider market could yet overtake the company, undermining much of the good work Fitzgerald has done. A debt free balance sheet at least means the group is better positioned to weather the inevitable downturn.

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First Half Trading Update

First half completions were split between 550 affordable homes and 1,030 private houses. A 47.8% increase in affordable housing sales meant average sales prices fell to £261,000 (2017: £277,400), although the average selling prices of private properties remained broadly flat.

Net private reservations per site per week rose 8% to 0.52, with the group operating from an average of 86 sites over the half (2017: 96). Bovis expects to open a further 6 sites in the coming quarter.

The group finished the period with net cash of £40m, compared to net debt of £32.4m in the previous year. The sale of non-core assets continues, with management confident it will deliver £180m of additional cash by the end of the year.

Bovis says it's on course to hit its full year expectations, with clear progress towards medium term targets of a 23.5% gross margin and 25% return on capital employed.

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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.