Stick a list of housebuilders on a dart board and throw a dart. Assuming you don't miss, it may prove hard not to pick a winner in the current climate. But why do we think Bovis Homes (BVS) stands out? The key reason is that the shares have not performed as well as their rivals and at 1.7 times net assets are rated below the sector average, see table. Yet the issue normally associated with the shares discount rating - a low return on capital employed (ROCE) - is rapidly being rectified.
- Cheap rating compared with other housebuilders
- Fast improving dividend
- Strong forward sales
- Benign land inflation
- Rising labour costs
- Planning constraints remain
Bovis's low historic ROCE was largely the result of a relatively slow sales rate, which led to a much slower turnaround of capital employed. However, by controlling costs and accelerating sales ROCE has risen dramatically from just 2.4 per cent in 2009 to to 16.2 per cent in 2014. While this is admittedly still below the ROCE being reported by rivals such as Crest Nicholson (26 per cent) and Persimmon (24.6 per cent), Bovis is rapidly making up ground and expects to generate ROCE of 30 per cent from developing the land it has bought so far this year.
Bovis versus peers
| Name | Bovis Homes | Taylor Wimpey | Persimmon | Crest Nicholson | Berkeley Group | Bellway | Galliford Try |
|---|---|---|---|---|---|---|---|
| TIDM | BVS | TW. | PSN | CRST | BKG | BWY | GFRD |
| Price | 1,091p | 184p | 1,962p | 535p | 3,094p | 2,347p | 1,655p |
| P/BV | 1.7 | 2.3 | 2.7 | 2.5 | 2.7 | 2.0 | 2.6 |
| Forward NTM PE | 11 | 13 | 13 | 11 | 12 | 10 | 15 |
| DY | 4.2% | 0.9% | 4.8% | 3.8% | 5.8% | 2.2% | 3.2% |
Source: S&P Capital IQ
The rest of the group's 2014 performance was also robust. Legal completions were up by nearly a third, while the number of new sites added grew by more than a half. This is important because the twin pillars that have supported margin growth through the economic recovery have a limited life. Specifically, the relative benefits of building on land bought at knock-down recession prices are wearing off as its stocks from within the land bank are used up. The second pillar comprised an uplift generated by switching away from building apartments and into family homes, where margins are that much higher. But this transition has largely run its course. Still, Bovis has plenty of potential to build its revenues and profits by increasing output.
| BOVIS HOMES (BVS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,091p | MARKET VALUE: | £1.46bn | |
| TOUCH: | 1,089-1,092p | 12-MONTH HIGH: | 1,098p | LOW: 719p |
| FORWARD DIVIDEND YIELD: | 4.1% | FORWARD PE RATIO: | 9 | |
| NET ASSET VALUE: | 655p | NET CASH: | £5.2m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 426 | 53 | 30 | 9 |
| 2013 | 556 | 79 | 45 | 13.5 |
| 2014 | 809 | 134 | 79 | 35 |
| 2015* | 971 | 173 | 102 | 40.3 |
| 2016* | 1104 | 209 | 124 | 44.9 |
| % change | +14 | +21 | +21 | +11 |
Normal market size: 2,000 Matched bargain trading Beta: 1.19 *Shore Capital forecasts | ||||
Despite the uncertainty in the run-up to the general election, Bovis has maintained momentum, with forward sales in the first four and a half months of the year up by 8 per cent from the previous year at 3,049 and the number of sales sites also up 8 per cent. Crucially, the group is now building more than double the number of new homes per year since launching its growth strategy five years ago. But there is more to come. Bovis plans to add around 40 consented sites every year, with a view to growing annual volume to between 5,000 and 6,000 homes. That's up from 3,635 completed in 2014.
Cost inflation on the supply side has been restricted to rising raw materials, notably bricks and skilled labour. Importantly, land price inflation remains benign for two reasons. The first is that major housebuilders have shown restraint by maintaining strict hurdle rates for expected returns on land purchases, which has held back prices. Furthermore, the smaller builders continue to struggle to get banking finance, which has limited competition for land. House price inflation may moderate, but this is still likely to be enough to cover higher labour and raw material costs. Even so, with such a committed stance to upping the rate of output, there remains the risk that Bovis will find it tough to hold onto contracts with tradespeople attracted by the lure of working more profitably for another builder. As with other builders, the rate of expansion is likely to be constrained by delays embedded in the planning process.
Still, Bovis is busy building its land bank and between the start of the year to mid-May it added 1,759 plots of consented land on 10 sites, with further conditional contracts on 1,200 plots on 11 additional sites. Bovis reckons that the ROCE relating to land acquired this year will be in the region of 30 per cent.
Aside from ROCE, perhaps another gripe over the years has been the relatively paltry dividend payout, something that the group addressed last year by boosting the total dividend from 13.5p to 35p. What's more, in a recent trading statement Bovis indicated that the full-year dividend for 2015 will be stepped up to 40p a share. Analysts at Shore Capital actually reckon the group will better this, taking the prospective yield for this year to 3.7 per cent, rising to 4.1 per cent in 2016.
