Prospect of 8%-plus yield at Bovis

No one can accuse bosses at Bovis Homes (BVS) of being too cautious, of trying to under-promise and over-deliver, as the housebuilder’s new chief executive Jim Fitzgerald set out his “ambitious” recovery plan.

The former Galliford Try (GFRD) CEO set out his new strategy at Thursday’s interims, overshadowing a slump in both pre-tax profits and earnings per share (EPS), which fell by almost a third to £42.7 million and 25.7p respectively.

But that was of less interest to traders who quickly turned their focus to new targets set by Bovis. It now aims to deliver 25% return on capital employed (ROCE) by 2020, grow completions to 4,000 annually from a likely 3,500 in 2017, and make big shareholder payouts.

Miguel Borrega, analyst at broker UBS, said the ROCE target was “very ambitious”, noting that 25% has only been achieved in one year previously, 2004. It will be achieved from a combination of operating margin recovery – up to 18.5% from an estimated 13% this year – and reducing capital employed by £180 million.

Tip these bull points into the mixing bowl and you come up with an implied operating profit of £220 million in 2020, giving earnings per share (EPS) of 119p. That 14% higher than existing UBS estimates.

Improvements will fund an increase in the ordinary dividend. It rises 5% in 2017, but 20% next year to around 57p. Bovis will also pay £180 million of special dividends, equivalent to 134p per share, over three years to 2020. Bovis will move progressively towards an ordinary dividend twice covered by earnings by 2020, we’re told.

This, it said, demonstrates “confidence in the business and the strong outlook”, as market fundamentals remain “strong” with good levels of demand for new homes. Its comments echo equally bullish claims this week from peer Redrow (RDW).

Bovis, which is primarily focused on the Midlands and South of England, said its average selling price improved 9% to £277,400 during the first six months of 2017, thanks largely to completions at higher end sites. Overall, completions fell to 1,512 during the period. The targeted 4,000 homes built per year will be achieved by merging operating regions to create seven key areas.

First-half profitability was always expected to be impacted by increased build costs and an overweight operating structure. Trading in the second half has started strongly, though, and pre-exceptional profit is expected to be in line with management expectations.

Investors will be buoyed by industry veteran Fitzgerald’s assessment that the current land bank is “valuable”, while the operational issues identified “are all very fixable”. Good progress has already been made. Bovis shares rocketed as much as 11% Thursday to a two-year high.

“We believe over the short term Bovis will continue to see some challenges and restructuring is still ongoing, meaning these targets are likely to be back-ended towards 2020,” said Borrega.

“Note though that sector is on 10x earnings, suggesting that Bovis could be worth c1,190p a share once at new running speed, so a lot of recovery has already been priced in.”

Others agree. Liberum’s Charlie Campbell is excited by the story, with compound earnings growth of 17% per annum by 2020 and dividend yield – including specials – of around 8% in 2018-20 making Bovis a grower and returner.

“This is likely to be appealing to many investors,” he says, but admits that a lot of the recovery has already been priced in.

With most price targets under the £10 mark, Numis is by far the most bullish on Bovis, hiking its objective by 17% to 1,275p, implying upside of over 12%.

Bovis will become the highest yielding stock in the sector on Numis’s forecasts, with the yield expected to reach 10% by 2019.

It’s been a mixed performance during reporting week for housebuilders. While many have rallied, investors were less enthusiastic about Barratt Developments (BDEV) and Berkeley (BKG). Both have had an incredible run and company comment was not sufficient to generate further buying.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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