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Bovis back on track

The housebuilder has been restructured, and promises a dividend to lead the sector
September 14, 2017

Until recently Bovis Homes (BVS) was the bad boy in the housebuilding sector, consistently underperforming and finally issuing a profit warning early this year, shortly after David Ritchie resigned as chief executive. Mr Ritchie was replaced in April by Greg Fitzgerald, who for 10 years until 2015 was chief executive of rival Galliford Try (GFRD). One of his first jobs was to fend off speculative bids from Redrow (RDW) and, coincidentally, Galliford. Having succeeded, Mr Fitzgerald's next task was to restructure the company to improve its image with customers and to reverse the consistently poor return on capital employed: a key metric for the sector.

IC TIP: Buy at 1138p
Tip style
Income
Risk rating
Medium
Timescale
Medium Term
Bull points

New management

Improving dividend

Restructuring benefits showing

Cheapest rating in the sector rating

 

 

Bear points

Question mark on 'help to buy'

Interest rates could be increased

Having bought 216,000 shares at 919.7p a share in June Mr Fitzgerald lost little time in reviewing and changing the fundamentals of the business, and while half-year profit for the six months to June was down by almost a third, there were clear signs that measures taken to put the business on a stronger footing were already starting to have an effect. To begin with, delivering 4,000 homes a year will need one fewer operating region, with the eastern and southern regions merged into one. Steps have also been taken to reduce an overweight operating structure, while £3.5m has been set aside to address customer care issues, all of which should be resolved by the end of 2017.

Slowing output means that capital investment in sites will be lower. Disposals of a number of sites are expected to generate up to £100m in cash, while other measures including a reduction in stock will generate up to £80m. Increasing efficiency by reducing the amount of capital employed will throw off a lot of cash, and shareholders will benefit through a 6 per cent increase in the total dividend payout in 2017, to 47.5p, rising a further 20 per cent in 2018 to 57p. In addition, in the three years starting from 2018 there will be total special dividend payments of around 134p a share (about 45p a year). That means that the forward yield in respect of 2018 jumps to around 9 per cent – the best in the sector. Thereafter, it plans to move progressively towards paying an ordinary dividend twice covered by earnings.

Slowing output means that Bovis can be more selective on land replenishment. The plan is to pull though around 10,000 plots from the strategic land bank over the next five years, while new land is expected to exceed the current hurdle rates of 25 per cent gross margin and 25 per cent return on capital employed. During the first half the group bought 2,337 plots at a cost of £102m, and appraised to exceed those hurdle rates. Trading in the second half of 2017 has already started on a strong note, with 96 per cent of sales for the entire year already secured.

Other measures taken to streamline the business include outsourcing some of its planning, design, engineering and legal functions, which has led to a 120 reduction in headcount. Restructuring costs are likely to be around £4m, with a provision for this to be made in the second half. On the production side, much more robust inspection and handover procedures have been introduced, while sub-contractor partnerships have been strengthened to ensure a higher level of supply chain accountability.

Given a clear run, the restructuring is likely to deliver substantial benefits, although there could be some headwinds to face, notably the ongoing review on help-to-buy and the prospect at some point of higher interest rates.

BOVIS HOMES (BVS)   
ORD PRICE:1,138pMARKET VALUE:£1.53bn
TOUCH:1,137-1,139p12-MONTH HIGH:1,167pLOW: 740p
FORWARD DIVIDEND YIELD:5%FORWARD PE RATIO:12
NET ASSET VALUE:753pNET DEBT:3%
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20140.8113478.235
20150.9516095.440
20161.0515590.145
2017*0.9412575.047.5
2018*1.0715492.757.0
% change+14+23+24+20
Normal market size:3,000   
Matched bargain trading    
Beta:0.40   
*Peel Hunt forecasts, except 2017-18 DPS from company, excluding specials