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OPINION

Bovis attracts merger speculation

Bovis attracts merger speculation
January 24, 2017
Bovis attracts merger speculation
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Speculation centred on reports that Schroders, with a 6.4 per cent stake in Bovis, had called on rival Berkeley Group (BKG) to propose an all-share merger. Such a move would be the first consolidation within the sector since the near-disastrous marriage of Taylor Woodrow and George Wimpey in 2007. Analysts remained sceptical, pointing out that Berkeley is performing very well on its own and has no experience of making a large takeover. Other companies such as Redrow (RDW) have attracted comment as a possible suitor, although all parties remain tight-lipped on the subject.

Slower-than-expected completion on a number of houses prompted Bovis to warn that completions in 2016 would be lower than previously expected. Bovis has attracted criticism in the past for its below-sector-average return on capital employed, so while it has performed well, it has not done as well as its rivals. The next blow came when chief executive David Ritchie announced his resignation.

Calls for Bovis to be taken under the wing of a better-performing housebuilder could be more of a wake-up call from some shareholders, and with no one at the helm Bovis looks more vulnerable, especially as the shares are relatively cheap in relation to the sector average when comparing price to book value. One reason for the low valuation is that Bovis has an operating margin of around 15 per cent compared with nearer 20 per cent for its peers. That means it generates less cash, and shareholders don't get the high dividend payouts that are on offer elsewhere.

But after a gruelling period in the wake of the financial crash, the builders are in a sweet spot at the moment. Mortgages are cheap while demand is strong. Land prices remain low, and build cost inflation is more than covered by rising sales prices. Most builders have substantial land banks and are lightly geared. While there are always attractions, the task of buying a rival builder carries a significant element of risk, especially if the ideal trading conditions took a turn for the worse.

Church House Deep Value fund manager Jeroen Bos admitted that he bought shares in Bovis in the wake of the Brexit referendum vote, since when the shares have risen by 10 per cent. And given the relatively weaker performance, rumours surrounding a possible takeover didn't come as much of a surprise, he added.

Bovis has had its fair share of problems over the years (see 'Why Bovis Needed a Breath of Fresh Air'), but the only hard fact surrounding recent merger speculation is that Schroders has seen its holding move up in value by over 3 per cent. The danger is that this could evaporate if Bovis was to play down the rumours.