Bovis Homes

Description

Bovis Homes is a UK-focused housebuilder, employing over 1,000 people and operating across seven territories covering south and central England. The company has a rich British heritage, having been founded in 1885 in Marylebone, London. In 1997, it successfully listing on the London Stock Exchange.

In 2016 the company’s growth ambitions were derailed by weaknesses in its production process and a number of customer services issues. This led to a change in management in 2017, with Greg Fitzgerald joining as the new chief executive officer (CEO) and planning to put the business on the right track.

Investment case summary

To some extent, the investment case in Bovis Homes is similar to other housebuilders we’ve introduced in the funds since early 2017 – our increasingly positive view of the UK’s economic prospects combined with the wider market’s pessimistic view towards domestically exposed businesses in the aftermath of the EU referendum, created a contrarian opportunity to revisit the UK housebuilding sector for the first time in many years. In doing so, Bovis Homes emerged as one of several housebuilders that have looked attractive enough to force their way into the portfolios.

In our view, UK housebuilders and the construction industry more broadly is benefiting from structurally positive supply-demand dynamics. Fixing the UK’s ‘broken’ housing market inevitably means building many more homes and, although some have concerns about house prices, from an affordability perspective, with interest rates near record lows, mortgage repayments represent a much smaller part of take-home pay than is normally the case.

Importantly, however, the Bovis investment case is also about its management’s ability to effectively turnaround the business. Indeed, recent news flow from the company highlights encouraging progress in putting it back on the right track. Throughout this period, the company’s balance sheet has remained robust and its attractive cash generative capabilities unaffected – indeed, we believe these capabilities have been enhanced by management initiatives. Our analysis suggests that the company can continue to create shareholder value by distributing a healthy stream of dividends, as well as generating capital growth as the company continues to transform.

Ask a question about our investment in Bovis Homes

Fund exposure
Income Focus Fund 3.17%

As at 31 March 2019

Segmentation
Geography United Kingdom
Industry Consumer Goods
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Positive trading update

Bovis released a trading update for its 2018 financial year yesterday. This provides further evidence of the positive progress being made by the sector, building on statements from the likes of Taylor Wimpey and Persimmon earlier in January. The sector has started the year strongly but remains very substantially undervalued, in our view.

Housing completions grew by 3% to 3,759 and average selling prices were also marginally higher. Profits are now expected to come in slightly ahead of consensus expectations. The business is on track to deliver over £180m net cash from its balance sheet optimisation programme. Bovis secured more than 4,000 plots for its land bank during the year, considerably more than in the prior year. This bodes well for future growth and returns, when we consider that the acquired land is expected to deliver at least a 26% gross margin and a 25% return on capital employed.

Overall, these are solid results from Bovis, which is executing just as it promised. The expansion into Partnership-type business is an interesting development and is in line with many of the large housebuilders. As this part of the business scales, the cyclicality of the group will reduce. Any slight margin erosion due to this expansion should be met with multiple expansion to reflect a more dependable business model. With an 11% dividend yield, this business remains very attractively valued, in my view.

Stephen Lamacraft
17 January 2019

Good progress

Today, Bovis Homes reported an encouraging set of interim results which highlighted that its new CEO is delivering on his restructuring promises, with the business making good progress across all four margin initiatives – cost cutting, price optimisation, improved build quality and efficiency and launching its new Phoenix housing range.

As a result, the company’s total completions were up 4%, while its revenues increased by 1% over the period. Additionally, its cost reduction initiatives helped its gross margin to grow by 2.8% (to 20.9%) and its earnings per share to rise by 40%. Meanwhile, Bovis also returned to shareholders an interim dividend of 19p, representing a 27% increase. These are very good numbers, in our view.

Moreover, the business is on track to deliver a minimum of £180m net cash from restructuring its balance sheet by the end of 2018 – two years ahead of schedule. The company also has excellent visibility on its land supply with 99% and 78% of plots secured for 2019 and 2020 respectively. Finally, having secured 96% of sales for 2018 already, Bovis now anticipates profits for the full year to come at the top-end of management expectations.

Overall, we are very pleased with the progress the company is making and remain focused on the long-term potential of the business. It continues however to trade on a very depressed valuation, offering an attractive estimated dividend yield of 9% at the time of writing.

Stephen Lamacraft
6 September 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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