Management was also keen to emphasise the five-star Home Builders Federation customer satisfaction rating it has been trading at since October. That is unsurprising given the housebuilder’s history with build quality control problems – two years ago the group was forced to warn on profits and slow down production to resolve build quality issues.
Admittedly, since then progress has been made. Following a restructuring of its operations – which included reducing operating regions and disposing of sites – the return on capital expenditure has improved, rising from 17 per cent in 2016 to 19.3 per cent last year. Like peers including Bellway (BWY), that has been precipitated by growing the proportion of affordable homes completed in partnership with housing associations. Indeed, during the first half affordable homes accounted for all the 4 per cent growth in completions, while private homes were flat.
Yet, despite that progress, Bovis looks undeserving of the premium being attached to its shares – which are trading at 1.3 times consensus forecast book value at the 2019 year-end – in comparison to mid-cap rivals such as Bellway and Redrow (RDW). Both those peers posted superior returns on capital and operating margins on unveiling their last set of full-year results. For instance, Bellway posted an operating margin of 22.1 per cent and return on capital employed of 27.2 per cent in 2018. Meanwhile, Redrow achieved a 19.9 per cent margin and 28.5 per cent return on capital that same year.
Bovis has made much of boosting its gross margin to at least 23.5 per cent by 2020, from the 21.8 per cent recorded in 2018. That would be not too far off the post-crash high of 24.5 per cent achieved in 2015. Yet, despite cost-cutting measures, that may be difficult to achieve in the wake of flat average sales prices and cost inflation of between 3 and 4 per cent, which has stymied most of the UK’s housebuilders this year.
A further slowdown in transaction volumes in the private market and reduction in sales prices would make those margin targets even harder to achieve and, while affordable homes are more in demand, they also carry lower margins. What's more, during the second half of last year the group increased its use of part-exchange – a process where builders take a buyer’s existing property as part-payment for a new-build home – to 15 per cent of private completions, up from 8 per cent during the prior six months. In February, management said it saw an increase in part-exchange as “a sales opportunity” this year and was comfortable for part-exchange to be at a similar level as 2018, which came in at 8.7 per cent of private completions. That could also make it harder to meet margin targets.
