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Bovis - plenty of progress in the first half

George Salmon | 9 July 2019 | A A A
Bovis - plenty of progress in the first half

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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: 1,204.00 | Buy: 1,205.00 | Change 9.00 (0.75%)
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Bovis has issued a trading statement in relation to the six months to 30 June 2019. It shows completions, sales rates and customer satisfaction all rising.

While mindful of Brexit uncertainty, the group is confident it can deliver good progress over the financial year as a whole.

The shares rose 2.4% on the news.

View the latest share price and how to deal

Our view

Greg Fitzgerald's transformation at Bovis is largely complete. While the former Galliford Try executive deserves credit for his achievements, the fact the shares still offer a lofty prospective yield of 10.1% yield reflects the fact Brexit induced uncertainties remain in play.

But first, it's worth detailing the progress that's been made in the last few years.

After being plagued by issues around build quality, Bovis now boasts a rating to rival its peers, and could well get top marks in the next survey. That's helping restore public confidence in its work, which was damaged by stories of buyers being given the keys to half-finished homes.

There's also been significant operational progress.

The five years to 2017 were boom time for the builders but while others were stretching out margins, Bovis was struggling. Now, cost saving plans and more efficient designs mean profitability is improving, and analysts are hopeful the trend can continue, despite input costs continuing to rise. Slimming down through asset sales improves return on capital too - which has seen returns to shareholders step up.

However, internal progress does nothing to alter wider conditions. The housing market is showing signs of slowing, with price growth stalling across the country. A disorderly Brexit could make that worse, and that's surely contributing towards declining demand for larger, more expensive homes.

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.

A healthy balance sheet means the group is at least better positioned to weather a downturn than it has been in the past, and its price to book value of 1.3 is below several 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 near-term performance will continue to be dominated by factors that are largely outside the group's control.

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Half year trading update

1,647 houses completed in the half year, a 4% increase on the prior year. Of this 1,031 (2018: 1,030) were private units and 616 (2018: 550) affordable. Underlying price inflation was minimal, but the average prices rose 3% to c. £270,000 on account of an improved sales mix.

A continued focus on build quality meant for a 'controlled' expansion, sales rates increased from 0.52 per active site per week to 0.6.

Bovis says its margin initiatives are helping offset cost inflation, which was running at 3-4% at the start of the year, but has begun to recede more recently.

The roll-out of the new Phoenix range is progressing, and the first completions have received good customer feedback, putting the group on course for a five star HBF rating.

Bovis has acquired 1,164 new plots across 9 sites in the year to date. The group reported a net cash position as at 30 June 2019 of c. £103m (30 June 2018: £42.8m), boosted by higher than expected proceeds from 2017 balance sheet optimisation programme.

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.