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Bovis - reconsidering merger with Linden Homes

George Salmon | 10 September 2019 | A A A
Bovis - reconsidering merger with Linden Homes

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Bovis Homes Group plc Ordinary 50p

Sell: 1,102.00 | Buy: 1,103.00 | Change -33.00 (-2.91%)
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Increased revenue and margins saw half year pre-tax profit improve 20%, to £72.4m.

Bovis also said it's reconsidering a merger with Galliford Try's housing business, and high level terms for a potential transaction have been agreed.

The shares fell 4.1% following the announcement.

An interim dividend of 20.5p has been announced - an 8% improvement on last year.

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Our view

When Greg Fitzgerald took over as CEO in 2017 Bovis was plagued by stories of buyers being given the keys to half-finished homes. Those build quality issues have been resolved and the group now boasts a strong satisfaction rating.

There's also been improvements to the financials. 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.

With these improvements ticked off, the group is looking for its next projects.

After being rebuffed earlier in the year, Bovis has come back with a slightly improved offer for Galliford Try's homebuilding unit. With high-level agreements in place, Fitzgerald looks to have a better chance of getting a deal for a part of the company he used to run through, although there's no guarantee it'll get over the line.

The cost saving and land bank opportunities may well be attractive, but we think the deal has potential, but the timing could prove awkward.

The deal runs the risk of slowing down the so-far impressive improvements to margins, and wider conditions are clearly tricky. The housing market is showing signs of slowing, and a disorderly Brexit could make that worse, and that's surely contributing towards declining demand for larger, more expensive homes.

Support from the Help to Buy scheme is set to end in 2023 - which accounts for 25% of Bovis' sales - and the favourable mix of low unemployment and low interest rates 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 any difficulties than it has been in the past. But the fact remains a price tag of £1bn+ means there's a lot riding on any potential deal paying off.

The group now trades on a valuation broadly in line with peers, but income seeking investors will note that Bovis still offers a lofty yield of 10% despite the recent operational improvements. Still, with uncertainty around the economic future of the country, that dividend shouldn't be seen as guaranteed.

Overall, Bovis has impressed during its recovery, but near-term performance will continue to be dominated by factors that are largely outside the group's control.

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Potential merger with Linden Homes

Should the deal go ahead, Bovis will pay a cash sum of £300m to Galliford Try, and Galliford Try shareholders will receive 0.57406 Bovis shares for each of their Galliford Try shares, a total value of £675m (on 9 September 2019).

The group believes the deal would generate significant cost savings, allow the group to compete more effectively in the UK housebuilding market and "accelerate Bovis Homes' move into the higher growth partnerships and regeneration markets".

Half Year Results

Revenue rose 9% to £472.3m, as total completions increased 4% to 1,647 homes, and average selling prices reached £269,200, up 2% on last year.

Despite build cost inflation of 3%-4%, operating margins were 16% (2018: 14.6%). In order to continue countering build cost inflation, the group's working with supply chains to introducing specification changes, and continues to implement cost saving initiatives elsewhere.

There was a 15% increase in private sales rates in the half, and ten new developments were opened. A total of 24 are due to launch for this year.

The group acquired 2,007 plots of land, across 12 sites, and expects to maintain a land bank with 3.5 - 4 years' worth of supply - in line with strategy.

Net cash more than doubled from £42.8m, to £102.4m, partly driven by a reduction in loans. Land creditors decreased by £43.9m over the half, to £249.4m.

Looking ahead, Bovis says it's on track to make further progress against medium term targets, and that 96% of this years' completions are secured. Added to this, the group has maintained its four star housebuilder status, and is trending towards achieving five stars.

A further £60m will be returned to shareholders in the second half.

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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.

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