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Bovis - margin improvements helping profits

George Salmon | 16 January 2019 | A A A
Bovis - margin improvements helping profits

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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: 1,200.50 | Buy: 1,201.00 | Change 5.50 (0.46%)
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Bovis has said full year profits were slightly ahead of consensus, as a "substantial step-up in operating margin" yielded results.

The shares rose 1.3% in early trading.

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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's 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, and slimming down through asset sales improves return on capital - creating the potential for some chunky special dividends we think.

The shares offer a prospective yield of 10.7%. 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 a disorderly Brexit could make that worse. Declining buyer confidence means demand for larger, more expensive homes is slowing and around 15% of transactions now rely on part-exchange. That's not too 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. That could undo 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 been in the past. Its price to book value of 1.2 is below many other builders and we think 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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Q4 trading update

Bovis says it's on track to beat its medium term target of delivering £180m additional cash. The majority of that extra cash will come from cash-saving joint ventures, and strategic land disposals.

The group delivered a total of 3,759 new homes in the year, an increase of 3% on the prior year. Average selling process also nudged up inline with expectations to £273k.

The sales rate per outlet per week for the year to date is broadly flat on last year at 0.5, although uncertainty around Brexit meant demand for larger homes was lower over the year.

The group continues to utilise part-exchange deals to encourage sales as Brexit uncertainties linger. However, Bovis says no units have been owned and unsold for more than three months.

Land buying increased significantly over the year, with 4,164 plots secured, compared to 2,550 in 2017. Bovis says acquisitions are being made with an average expected gross margin of at least 26% and ROCE of 25%.

The group's said it's maintained a four star housebuilder rating.

Find out more about Bovis shares including how to invest

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.