I have also been keeping a close eye on Bovis Homes (BVS: 811p), a company I first recommended buying shares in at 820p ('Short-term trading buy’ 8 July 2013) and again at 790p ahead of the company's half-year results in late August (‘Profit from the property boom’, 14 August 2013). Although the price subsequently rallied to around 860p following the first of those articles, it never hit my target price of 900p. Profit taking ensued, but despite the lack of progress I had no hesitation in reiterating the advice a couple of months ago even though the share price had fallen to 704p (‘Shrewd insider buying at property play’, 30 September 2013). And with Bovis’s share price clawing back to above 800p, I feel a move back to 860p and to my initial 900p target price is just a matter of time now that we are coming into the favourable period for housebuilding shares. A trading statement from the company earlier this month only adds to the investment case.
Strong trading performance
Buoyed by government support in the form of the Help-to-buy scheme, and an increased availability of higher loan to value mortgages, Bovis has so far booked reservations on 2,390 private homes in the 44 weeks to 1 November 2013, around 45 per cent ahead of the same period in 2012. Guidance is for around 2800 completions this year with prices at least 10 per cent higher than in 2012, mainly reflecting a change in product mix. In turn, this is expected to drive operating profit margins up from 13.4 per cent last year to 15 per cent, and with the benefit of improved capital turn, return on capital employed should rise to at least 10 per cent.
The bottom line is that analysts expect the company to report current year revenues of around £535m, pre-tax profits of £76m and EPS of 45p. But investors are forward looking, so the 2014 numbers are far more relevant to me given the momentum we are seeing in the housing market. For next year, analysts expect revenues to surge to around £615m, pre-tax profits to hit almost £100m and EPS to rise to 58p, almost double the 30.7p a share reported in 2012. These estimates could prove conservative since Bovis has accelerated the building of its private forward order book for 2014, which is already materially greater than the private forward order book as at 1 January 2013.
And with the benefit of a strong balance sheet – net debt is currently only £125m, or a modest 16 per cent of net assets of £770m – the board can afford to return some of these profits back to shareholders by way of dividends. Analysts predict the payout will be lifted from 9p a share last year to 12p this year, rising again to 16p and 20p, respectively, in 2014 and 2015. On this basis, the forward yield for 2014 is around 2 per cent.
Conservative balance sheet
It’s well worth pointing out that Bovis rates one of the cheapest housebuilders in the sector trading on a price-to-book value of 1.3 times for calendar 2014, a 25 per cent discount to the sector average. True, this is justified in part by a return on capital employed (ROCE) below the sector average. However, as asset turn is driven higher as completions continue to rise, then ROCE will too and so should narrow the discount to peers.
The modest price-to-book value also looks anomalous once you consider that the company's land bank is conservatively valued. According to the company the 15,579 plots in the consented land bank have potential to generate gross profit of £733m, calculated using prevailing sales prices and build costs. In addition, Bovis has 19,341 potential plots of strategic land, and also has contracts in place to acquire another 1,200 plots on 13 sites, a number of which are expected to be added to the consented land bank by the end of this year. To date the company has added no fewer than 3,300 plots (or 14 months supply at current build rates) on 22 sites to the consented land bank in the first 10 months of this year.
In other words, the land bank could end the year at around 35,000 plots, or the equivalent of 12.5 years output at the current run rate. This is by far the longest in the sector. It also means that Bovis has substantial profits embedded in the land bank, which are not reflected in its current valuation. In my opinion, this makes the modest premium its shares trade at to book value even more anomalous.
Upgraded target price
The technical set-up is certainly supportive of further upside in the share price in the months ahead. Firstly, the share price has just taken out the key 810p resistance level that has capped progress since August. Secondly, the 14-day RSI is showing a reading of 60, so is not overbought and the price is trading modestly above both the 20-day and 50-day moving averages, so is not overextended. And thirdly, the MACD is positive and above its signal line which is also bullish.
So with both the fundamental and technical set-up positive, I feel my price target of 900p is now too conservative. In fact, it would not surprise me at all to see Bovis shares run up into a trading range between 930p and 980p, the former being the price peak in March 2006 and the latter being a major low in February 2007 before the price hit an all-time high in April that year. Even then the shares would be lower rated on a price-to-book value basis than most of its peers. Trading buy.
Finally, I have written three columns today, all of which appear on my home page. In response to recent newsflow, I am currently working my way through a long number of updates on the following recommendations: Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), Mountview Estates (MTVW), WH Ireland (WHI) and Pilat Media Global (PGB).
MORE FROM SIMON THOMPSON ONLINE...
In the past fortnight I have published articles on the following 14 companies or trading strategies:
■ Trifast ('A bolt-on purchase', 18 Nov 2013)
■ Global Energy Development ('Awaiting pay dirt', 19 Nov 2013)
■ Entertainment One ('Blue sky territory', 20 Nov 2013)
■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
■ Polo Resources ('Unloved and undervalued', 21 Nov 2013)
■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
■ Eros ('Conundrum to solve', 25 November 2013)
■ Amino Technologies ('Conundrums to solve', 25 November 2013)
■ Town Centre Securities ('Time to make friends up north', 25 November 2013)
■ Raven Russia ('Cash in on a Russian property play', 25 November 2013)
■ Sanderson ('An app investment', 26 November 2013)
■ Equity market strategy ('Betting on a Christmas rally', 26 November 2013)
■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 November 2013)
■ Housebuilders trading strategy ('As safe as houses', 27 November 2013)
