UK housebuilders are enjoying a renaissance right now, but cost pressures could start to build, admits Bovis (BVS) chief executive David Ritchie. Rising costs could come from higher raw material prices such as bricks, as suppliers try to keep up with a big increase in demand. Skill shortages could also play a part, with many skilled workers such as bricklayers having quit the industry during the long years of crisis. Subcontractors will also be keen to rebuild margins battered in the downturn.
However, Bovis reckons these pressures are likely to be countered by an increase in selling prices, sponsored in part by a shift in the product mix towards family homes in the more prosperous south east. Meanwhile, margins can still be massaged up by the use of more recently acquired land - although these benefits will fade as legacy land banks are used up.
Current trading conditions fall little short of ideal. In a trading statement for the financial and calendar year 2013, Bovis revealed that completions rose 19 per cent to 2,813, while average sale prices jumped 14 per cent to £195,100, primarily thanks to a renewed focus on larger houses in the more expensive south. Operating margins rose sharply - from 13.3 per cent in 2012 to nearly 15 per cent. Forward sales are also strong, up 77 per cent at 1,377, of which roughly half were private homes and half social housing.
Deutsche Bank says...
Buy. Bovis has delivered impressive growth in the private order book and a significant hike in prices as a result of a change in the sales mix. Sales outlets, sales prices, margins and return on equity are all expected to rise again in 2014, but with no indication of the scale of this improvement we believe it may be too early for a significant movement in consensus forecasts. But we do feel there is scope for a re-rating further down the line. Expect 2013 pre-tax profits of £76m and EPS of 42.9p, rising in 2014 to £118m and 68.1p.
Panmure Gordon says...
Buy. All the metrics are strong for Bovis - most notably the 77 per cent jump in forward sales and the improved return on capital. This makes the price-to-book discount at which the company's shares trade relative to peers hard to justify. The number of active sites has risen 10 per cent, and the sales rate on a per-site per-week basis is up 34 per cent. On top of this, the company has continued to shift towards building larger family homes, with more of these being built in the more buoyant south east. We are forecasting earnings per share of 43.7p for 2013, rising to 67p for 2014, with a target price of 900p.
