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Bovis - Profits build as margins restored

Nicholas Hyett | 6 September 2018 | A A A
Bovis - Profits build as margins restored

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Increased completions drove a 1% rise in revenues to £432.2m. Combined with a significant improvement in margins, that saw profit before tax rise 41% to £60.2m. Full year profits are now expected to be at the top end of management expectations.

The Bovis board declared an interim dividend of 10p per share, up 27% on the previous year.

The shares rose 1.6% 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. Rising build costs were paired with a drop in completions and a dramatic decline in build quality.

Enter new CEO Greg FitzGerald, an old hand in the industry with an excellent reputation. He focused on creating a slimmer, slicker and higher quality business, with an emphasis on restoring margins through price growth and build costs. Early results have been promising.

Customer satisfaction and pricing have improved. Efforts to strengthen the balance sheet are showing signs of success as well, and slimming down through asset sales improves return on capital creating the potential for some chunky special dividends.

The shares offer a prospective yield of 9.2%, at the upper end of the sector. That suggests there may be some upside in the share price if all goes to plan, but it takes time to shift a reputation for shoddy building.

Conditions don't get much better for housebuilders than they are at present. But low unemployment, low interest rates and supportive government policy won't continue forever. And worries about the wider housing market have seen the shares come off a bit since the start of the summer.

Should the wider housing market start to creak, Bovis would be squarely in the firing line and that could undermine much of the good work Fitzgerald has done. Still, a debt free balance sheet means the group is better positioned to weather the inevitable downturn and the group certainly looks in far better health than it has in the past. A price to book value that's below many other builders could yet make it an interesting, if higher risk, option for housing investors.

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Half Year Results

Completions rose 4% in the first half to 1,580, although average sales prices remained unchanged at £334,700.

The significant improvement in the group's gross margin, which rose from 11.4% to 14.6%, was driven by cost saving initiatives, an increased focus on price and higher margin developments from the land bank. The group has also launched its new Phoenix housing range, where lower build costs should help boost margins.

In the first half of the year the group acquired 828 plots across five developments, including 167 from the strategic land bank. The land acquired so far this year is expected to deliver a gross margin of at least 26%.

The group finished the period with 16,107 consented plots in the land bank - 16.7% below this time last year - following the creation of joint ventures at Sherford and Wellingford.

Customer satisfaction continues to trend well above 80%, with 36% of buyers making use of the Help to Buy scheme.

The group finished the period with net cash of £42.8m (2017: net debt of £32.4m), boosted by a decline in part exchange agreements.

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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.

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.