Bovis accelerates land purchases

Bovis Homes' (BVS) trading statement this month revealed that management is upbeat about the strength of the UK housing market, while profits for 2012 are expected to be ahead of market expectations. Bovis is bullish about the year ahead, too, and has invested strongly in picking up consented land - it has acquired around 3,500 plots on 24 sites. But, thanks to strong cash generation, the group ended the year with no debt and cash of £19m, although this was down from £51m at the start of the year.

Business has been brisk, with legal completions up 15 per cent at 2,355 and average selling prices ahead 5 per cent at £170,700. All of this has helped to give operating margins a significant boost, rising from 10 per cent to 13.5 per cent, with additional help coming from improved efficiencies as well as a positive contribution from land sales and building on cheaper land. That positive trend looks set to continue, with forward sales for 2013 delivery up 37 per cent at 778. Moreover, the group has started the new year with 90 active sales outlets - that's 13 per cent more than a year earlier, and more outlets are expected to be opened during the year.

Northland Capital Partners says...

Buy. Given the growth in sites this year, and with sales coming from higher-margin plots - that has risen from 40 per cent of total output to 60 per cent - earnings growth should continue to accelerate. This better trend will help to boost the group's recovery strategy, helped further by its south of England bias. Moreover, Bovis is making strong progress on improving the return on capital employed and this will have risen in 2012 by around 50 per cent to 7.5 per cent. We are increasing our share price target to 700p, and expect pre-tax profit for end-2012 of £50m, with EPS of 28.4p.

Numis Securities says...

Hold. Bovis has made strong progress, with volumes, margins and average selling prices all well ahead of 2011's performance. However, we continue to believe that Bovis's slow asset turn will lead to sub-sector returns on capital even if the group reports one of the highest margins in the sector. That is likely to limit the share price to a net tangible asset value rating - suggesting that better value exists elsewhere. Nevertheless, we have increased our target price to 595p, but we are leaving our forecasts unchanged - we expect end-2012 EPS of 29.3p, rising to 38.5p in 2013.