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Bovis - confident despite Brexit uncertainty

George Salmon | 15 November 2018 | A A A
Bovis - confident despite Brexit uncertainty

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Vistry Group Plc Ordinary 50p

Sell: 1,203.00 | Buy: 1,204.00 | Change 8.00 (0.67%)
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Bovis remains confident of hitting medium-term targets, with both financial performance and customer service measures improving.

However, the group also says Brexit uncertainty is weighing on customer sentiment.

The shares fell 2.8% following the news.

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Our view

A combination of low interest rates and supportive policies such as Help to Buy mean recent years have been 'fill yer boots time' for the housebuilders.

While other builders cashed in, rising build costs and a drop in build quality meant Bovis was late to the party.

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. 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 10%. That suggests there may be some upside in the share price if all goes to plan, but Brexit uncertainty looms large.

The housing market is already slowing, and the worry is it grinds to a halt in the event of a disorderly Brexit - which would clearly be bad news for the builders. A weak secondary market means around 15% of Bovis' transactions now rely on part-exchange, hardly reassuring.

In addition, low unemployment, low interest rates and supportive government policy won't continue forever, with Help to Buy set to peter out by 2023. 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 a downturn than it has in the past. Its price to book value of 1.3 is below many other builders and could yet make it an interesting, if higher risk, option for investors who think the housing boom has further to run.

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Trading details

Bovis says it's making good progress against its targets, and continues to expect margins to improve such that profits hit a record level this year.

The sales rate per outlet per week for the year to date is 0.51, bang in line with 2017, while pricing remains in line with expectations. However, the group says uncertainty around Brexit has impacted discretionary buyers. As a result, part-exchange deals have increased to around15% of transactions.

Land buying has increased, with 1,988 plots secured so far this half. These transactions are across 9 developments, 4 of which were converted from the strategic land bank. Bovis says acquisitions are being made with an average expected gross margin of at least 26% and ROCE of 25%.

The group's asset disposal programme continues, with the target still to generate £180m of cash by December 2018.

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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.