Bovis has built-in value

A key reason for Bovis's lowly rating stems from an inferior return on capital employed (ROCE) compared with other housebuilders. Historically, this was a consequence of Bovis' strategy of driving profit margins, while at the same time delivering a relatively slow sales rate. This meant a much slower turn round of capital employed. To remedy this, focus has shifted towards improving the sales rate to use capital more efficiently. The results have been impressive, with ROCE rising from 2.4 per cent in 2009 to 10.4 per cent last year. And chief executive David Ritchie believes that in the coming year this will increase to at least 14 per cent helped by a rise in operating margin from 14.9 per cent to 17 per cent. There's also a target of an 18 per cent margin and 18 per cent ROCE in the "foreseeable future".

Bovis is also focusing on how to maintain bottom-line growth in the longer term. This may look easy, but two of the principle pillars of support have a finite life. While the group has acquired a lot of cheaper land since the downturn, there are signs of land values now creeping up, and the legacy land bank of written-down assets now makes up just 10 per cent of the total.

Meanwhile, there is also only limited scope to continue to improve the product mix by shifting away from apartments and town houses towards traditional family homes, which now make up around half of the total output, and a deliberate shift in construction towards the more prosperous south of England is well advanced already. This has supported a steady rise in average sale prices, which was 14 per cent in 2013 compared with underlying sales price inflation of a more leisurely 2-3 per cent, but still enough to cover the first rise in labour costs since before the recession.

So, to boost long-term prospects, Bovis has taken steps to increase output by reloading the land bank at a faster rate than current production. In 2013 spending rose from £161m to £225m on adding 3,737 plots to the consented land bank, although strong cash flow meant debt at the end of 2013 was a nominal £18m.

Crucially, it has also moved to increase the number of sales outlets, as this will be the principal revenue-driver. Previously, the group operated through a three-region structure, but to cater for the expansion it now operates from six regions in two divisions, with plans for another two regions to be added later. This will provide the framework to increase the number of sales from the 2,813 completions last year to as many as 5,000.

Bovis versus peers

Source: Companies & Investors Chronicle