That way if the market continued to rally we had some skin left in the game to benefit from the upside, but if it corrected then at least we had banked some of the healthy paper profits. In the event the sector rallied further and by the end of April it was up 35.9 per cent on an offer-to-bid basis since the start of January. At that point I suggested banking profits on the final third of your holdings.
Since then I have been monitoring the sector closely looking for further trading opportunities. The good news is that there has been a major share price break-out today for Bovis Homes (BVS: 820p), and one that we can capitalise on now.
Interestingly, the company’s share price had stalled no fewer than four times at the 780p level since the end of April, so today’s 5 per cent surge through that level on the point & figure chart (10 point) is likely be the catalyst for potentially a powerful multi-week rally.
Buoyant sales
It is also a move based firmly on sound fundamentals as Bovis released a buoyant pre-close trading statement this morning.
In the first half of 2013, the company achieved 1,389 net private reservations, a 40 per cent rise on the same period last year. Importantly, the trend is accelerating as net private sales rate per site per week improved by a quarter to 0.59, which partly reflects the improving quality of active sales outlets, but also the positive impact of stronger home buyer sentiment. This has been helped by the government’s 'Help to Buy' scheme (announced in the March Budget), and the availability of cheap finance resulting from the Bank of England’s Funding for Lending initiative. Moreover, with the Bank of England, now under the leadership of new Governor Mark Carney, giving a strong signal to the markets last week that the low interest rate environment is here to stay for the next couple of years at least, this is great news for the housebuilders. It’s certainly buoying the confidence of home buyers as in the second quarter of 2013, Bovis achieved a net private sales rate per site per week around 60 per cent ahead of the prior year comparative period.
This benign backdrop is very good news for Bovis. That’s because the company’s sales have a distinct second half bias, so have more potential for earnings upgrades as the year progresses resulting from the improving sales environment than for other builders where the first half and second half sales volumes are more evenly spread. There is little to suggest that the sales momentum is likely to stall either.
Inside track on trading
In a trading update for the 19 weeks to 10 May, the board revealed that Bovis achieved 989 private net reservations (2012: 783), a 26 per cent increase year on year. However, by the end of June this had increased to 1,389 net private reservations, a 40 per cent rise on the same period last year. In other words, the company has sold 200 more properties in the last seven weeks than in the same period last year, helped by an 11 per cent increase in the average number of active sales outlets and a sharp improvement in the average private sales rate per site per week. To put this sea change in sales into some perspective, Bovis started 2013 with only 249 forward sold private homes.
Furthermore, with selling prices ahead of expectations, and margins on the rise – operating margins rose from 8.7 per cent to 11 per cent in the first half of 2013 – return on capital is set to hit a level approaching 10 per cent for 2013, up from 7.7 per cent in 2012. In other words, Bovis offers investors the quadruple whammy of improving sales, margins, return on capital employed and cash generation. In the circumstances, it’s hardly surprising that analysts have been hiking their earnings estimates.
For instance, construction analyst Anthony Codling at investment bank Jefferies has just raised his 2013 pre-tax profits estimate from £68m to £73m, based on revenues of £521m, up from £425m in 2012. This means underlying pre-tax profits are set to rise almost 40 per cent this year alone to drive EPS up from 30.6p to 42.2p and underpin a 33 per cent rise in the dividend to 12p a share. For 2014, Jefferies expects revenues to rise further to £586m, pre-tax profits to hit £95.5m and EPS to surge to 56.6p. On this basis, expect a dividend of 15p. True, with the shares prices at 820p, the forward PE ratio of 15.8 for 2014 is higher than for rivals. However, the premium rating is fully justified once you factor in Bovis’s land holdings and the future profit potential in the land bank.
Land holdings
At the start of the year, the company had 13,776 consented plots with potential gross profit of £600m, calculated using sales prices and build costs at the time. This was £76m higher than at the end of 2011. But with home prices on the move again, the profit from those plots is likely to have risen yet again, something I expect the company to make a point of when it reports half year results on 19 August. In fact, in the first half of 2013, Bovis added no fewer than 2767 consented plots on 18 sites to its land bank, double the number of sales, and has contracts in place to add another 1018 plots to the consented land bank in the second half. Bovis expects to earn a return on capital of 20 per cent on these acquisitions.
In addition, Bovis also has 19,318 potential plots of strategic land where it has “strong visibility on the potential to convert a number of sizeable land holdings into consented opportunities during 2013 and 2014.” Combined, a total land bank of over 34,000 plots equates to 13 years build based on an annual build rate of of 2800 completions. This is by far one of the longest and valuable land banks in the sector.
It also means that the company’s book value of £758m significantly underscores the true value of the land and the embedded profit in the plots when they are built out. The value in these land holdings explains why the company commands a market value of over £1bn, or 1.3 times a very conservative book value, and a higher earnings multiple than other rivals. The company also has very low gearing as net borrowings were only £48m at the end of June.
Buy the break-out
The short-term trading strategy here is quite simple. After today’s price surge Bovis share price is set to close at 790p or above on its point and figure chart, so will signal a strong buy signal which should be acted upon. On a tight bid offer spread of 819p to 820p the shares rate an immediate trading buy and my target price is 900p which if achieved will offer us 10 per cent upside. The time frame for this trade is three weeks.
