Help from Help to Buy
With Help to Buy confirmed as here to stay, Bovis Homes looks like a future outperformer as it to puts severe challenges behind it. The entire sector was underpinned on Monday after Prime Minister Theresa May said an extension of Help to Buy would be announced in The Budget in November, with another £10bn of funding. The scheme has been one of the main drivers of the sector’s growth following Britain’s decision to leave the European Union. Some developers report that the facility, which enables buyers to deposit as little as 5%, has accounted for as much as 45% of sales.
Bovis shares have largely kept pace with the wider sector this year, despite a string of embarrassing allegations over the quality of its homes and treatment of customers. These coincided with a downturn in sales and overall business strength which culminated in the exit of its CEO in April and a 31% drop in first-half profits, reported last Thursday. During the year, Bovis fended off two takeover bids and set aside £10m to fix up construction problems. The group has now sharply cut development plans, aiming to complete 4,000 homes a year by 2019 from 5k-6k expected previously. Completions declined 6% to 1,512 in H1, in line with expectations as the firm prioritises improvements in build quality.
Whilst Bovis stock has still managed to gain more than 35% this year, we think momentum from the group turning a corner makes it a compelling candidate among large housebuilders that can close the gap to shares of sector leader, Persimmon. Persimmon stock is up about 50% so far in 2017. We think Bovis’s reduced completions target remains ambitious but is now more credible. Furthermore, Bovis’ intention to “significantly” increase focus on affordable housing places it front and centre of the fastest-growing segment of the sector at a time when more stable peers like Barratt have concluded that current demand/supply dynamics are already close to optimal.
We see an opportunity for a slimmed down, more disciplined and reorganised Bovis, following exits from non-core operations, to dovetail with sector developments more efficiently than most rivals. Should the group succeed in reducing land bank by transferring half at two major locations to a JV we would see upside to capital efficiency plans. At below 13%, Bovis’s operating margin is currently the weakest of all large residential property firms against an average of about 20%. Targeting “minimum” net cash of £180m from balance restructuring and 25% return on capital employed will fill out its operating margin and lift profits above current expectations for 2018. Note consensus for underlying pre-tax profit is still slightly below 2016’s £154.71m.
Admittedly, Bovis’ ‘recovery valuation’ of 15 times next year’s EPS will make some investors think twice. It’s worth remembering the group’s long-term growth has kept close to average despite recent wobbles, whilst the very largest players have slowed. Even Barratt’s 3-year total revenue compound rate of 13.8% in its last financial year was below the c.20% average. Bovis’s plans to increase dividends by 25% by the end of 2018 and to move towards a twice-covered pay-out by 2020 also look cogent.
Continuing a theme of underlying strength that belies company-specific circumstances, Bovis’s technical chart shows quite orderly price action since late June last year that has pushed the stock to within 6% of all-time highs. Furthermore rising trend line support from two summers’ ago is well-validated by now and the stock recently cleared a resistance that had stymied the shares for about two-years. Bulls will have eyes on highs of the year close to 1170p, particularly amid favourable momentum feedback (e.g. RSI). The real prize will be record levels above 1200p which the stock last attempted to surpass in August 2015. Above 1170p, we would at the very least expect another go.
DAILY CHART: BOVIS HOMES
Source: Thomson Reuters and City Index
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