Why Bovis needed a breath of fresh air

Taking Stock

Why Bovis needed a breath of fresh air

It's been a tough few weeks for Bovis Homes (BVS). The housebuilder's boss of eight years, David Ritchie, has announced his immediate departure from the company, following a disappointing pre-close update sent just before the year-end. In it, the company said that slower than expected build production had meant 180 completions had slipped into 2017, another "operational stutter" in the words of analysts at Deutsche Bank, which led it to downgrade its recommendation on the company's shares, as did Jefferies.

There's a fair amount sitting in the in-tray of Earl Sibley, the company's finance director and interim chief executive. This is a housebuilder that has struggled to regain its footing since the financial crisis, which it headed into with an underlying operating margin that was "famously one of the highest in the business", as we wrote in 2009.


Bovis's sector-leading operating margin lost in the crisis


Bovis met that downturn with a much stronger balance sheet than its peers, but has since struggled to rebuild its profitability. So shareholders will no doubt welcome the promise of a "new direction".

The problem has partly been speed, or a lack of it. This has dragged on its return on capital, which is among the lowest of its peers. On broker Peel Hunt's forward-looking and more refined measure, which is the expected return on invested capital, Bovis was rock bottom: expected to deliver 11.2 per cent for 2016, compared with a sector average of 17 per cent.

All companies have bad moments, and Bovis has made progress on increasing its return on capital, particularly by increasing the hurdle rates for land purchases: this should pay off over the longer term. More specifically, it is looking to boost its capital efficiency by improving both the mix and location of its sites.

A strong sector has disguised some of the progress made, and the housebuilder has lagged behind its peers over the past five years, in terms of total return. As you can see from the below chart, if dividends are factored in, Bovis has managed to double investors' money, compared with an index containing the company and its eight largest peers, which has grown by 184 per cent.


Bovis's total return has undershot peers'


Then there is the reputational challenge. Take a LinkedIn post, entitled 'My Bovis Homes nightmare!!'. In the blog, army veteran Marc Holden says he moved into a new-build property put up by Bovis Homes (BVS) in March 2016, and claims there were a series of snagging issues, including ceilings that needed replastering, a lot of repointing on the external brickwork and a leaking gas boiler.

There's also a Facebook group entitled 'Bovis Homes Victims Group', describing itself as a place for "disenchanted" customers to share their woes, which has 640 members. A Bovis spokesperson said the company was aware of the issues with a "small" section of its customers, and had set up a team to respond to complaints from the group. The company is also working with Mr Holden to remedy the problems.

Perhaps we shouldn't read too much into individual issues. What's more, a company like Bovis can be swept along with the tide, and its discount to book value can be an opportunity: it is the only housebuilder trading below book, according to Deutsche's numbers. But once the market starts to level or dip, its faults may well come to the fore, and Liberum analysts worry that "as the slowest builder, it may be most at risk" from any tough policies in the government's imminent white paper. For Bovis's next boss, it may be a case of more speed, less haste.


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