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Bovis - on track to hit targets

Nicholas Hyett | 22 May 2019 | A A A
Bovis - on track to hit targets

No recommendation

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: 1,204.00 | Buy: 1,205.00 | Change 9.00 (0.75%)
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Bovis has reiterated it's on track to deliver medium term targets, and will deliver completions in line with expectations for the year.

A final dividend of 38p will be paid, taking the total ordinary dividend up 20% to 57p - plus the 45p special dividend paid in November.

The shares were unmoved following the announcement.

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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 most of the housebuilders.

While issues over build quality meant Bovis didn't make it to the party on time, performance has markedly improved since CEO Greg Fitzgerald took over.

First up, there's the good work that's been done on boosting public opinion - with Bovis now able to boast a rating to rival its peers. But it's not just PR enjoying improvements.

Management has worked hard to strengthen the business, with margins improving as a result. And, rather counterintuitively, Bovis' historic underperformance versus peers means there's more scope for trimming costs and keeping those margins moving upwards. Slimming down through asset sales improves return on capital too - which has seen returns to shareholders step up.

However, despite the improved performance, the shares still offer a relatively high prospective yield of 10%. That could mean significant upside if all goes to plan, but Brexit uncertainty looms large.

The housing market is showing signs of slowing, with price growth stalling across the country. A disorderly Brexit could make that worse. Declining buyer confidence means demand for larger, more expensive homes is slowing, and Bovis has adapted its builds accordingly, targeting first time buyers in particular.

Unfortunately Help to Buy is set to end in 2023, and low unemployment, low interest rates and supportive government policy won't continue forever either. Should cracks in the wider housing market get bigger, Bovis would be squarely in the firing line.

That could undo much of the good work Fitzgerald has done, although a healthy balance sheet means the group is better positioned to weather a downturn than it has been in the past, and its price to book value of 1.3 is below many other builders.

Overall, we think Bovis is doing the right things and doing them well. A relatively modest valuation, by industry standards, may also provide some downside protection, but performance will continue to be dominated by factors that are largely outside the group's control.

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Trading update

The group said demand for new builds remains strong, and so far this year the rate of private sales, per site per week, is 17% ahead at 0.61.

The group has so far opened 7 new developments and has been operating from an average of 87 sites. A further 16 new sites will be opened this year, with the number of active sites due to remain flat.

Bovis continues to see "good opportunities" in the land market, and 98% of its land for 2020 completions is now secured.

The roll out of the new Phoenix housing range is going well, with the first legal completions expected in the coming weeks. The group remains confident these builds will drive further cost savings.

Bovis continues to face inflationary cost pressures of 3% - 4%, but this is being offset by cost control elsewhere and margin initiatives.

The group was awarded four star housebuilder status, and says it's currently trending ahead of this rating in 2019.

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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.