Stock of the Day: Bovis Homes set for a strong start to 2018?

Britain and the EU are apparently on the verge of securing a Brexit divorce deal, which should pave the way for the second phase of talks – on trade – to begin.

UK Housebuilding at a 5 month high 

After a tough time, post Brexit referendum, the UK housing industry appears to be finding its feet. UK construction purchasing managers index (pmi) released today, showed that housebuilding activity increased much faster than expected in November. Housebuilding strength is proving to be a rare bright spot for the construction industry, which is otherwise struggling. 

Housebuilding hit its highest level in five months in November, as it is buoyed by resilient demand and supportive government policy. The government’s Help-to-Buy scheme, which lends equity to first time buyers has boosted the new homes market, as will the removal of stamp duty for first time buyers which Chancellor Philip Hammond announced in his Autumn Budget just a few weeks ago. 

In short, government policies are providing a supportive backdrop to keep demand for residential properties elevated. A downward trend following the UK’s decision to leave the European Union saw Bovis hit 739p in July last year. Bovis then hit another low point at the turn of the year, when it suffered reputational damage on reports of houses being incomplete. The share price remained depressed at 811p. 

Optimism surrounding relaunch in September 

Bovis is now three months into its relaunch, under a new Chief Executive Greg Fitzgerald. Mr Fitzgerald was considered the knight in shining armour for Bovis. He already had transformed the fortunes of Galliford Try during 10 years in charge and so hopes have been riding high regarding what he could be able to achieve at Bovis. 

In order to address the reputational damage, Mr Fitzgerald announced that Bovis would cut back on the number of homes being built, but focus on housing quality, building more affordable housing and delivering £180 million in special dividends by 2020. The latest financial results, released in September for the first half, were less than impressive, profits dipped in the first half by 31%, whilst the number of units completed dropped by 6%. 

Meanwhile, Barratt Developments saw 12% rise in pre-tax profits and a rise in revenue by 9.8%. However, November’s trading update was much more upbeat, with the firm making progress on its strategy. At the time of reporting it was already fully sold on its completions for 2017, with an increase in average sales price. 

How: Investors are expecting a more impressive trading update on 12th January. Despite the disappointing H1 result, investors have been putting their money on this turnaround boosting the bottom line at Bovis, and doing so relatively quickly. Since the end of August, just prior to Mr Fitzgerald taking the helm, Bovis has rallied over 7% to its current price of 1139p. Through a combination of resilient demand, government support and a realignment of priorities at Bovis could be in for a better start to 2018.

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