Bovis Homes Group - happy days for house building

Bovis Homes Group (BVS.L): These are great times for house builders. There is a structural shortage of housing and the population is growing. Mortgage rates are very low (albeit on the turn). Prices are rising, but affordability is holding good. The Government loves you and wants you to succeed. NIMBYs and the green belt are being sidelined/threatened. The need to include social housing in many new developments has been watered down to a minimal level. There may be build and land cost pressures, but these are nothing against all these positives. You can see all this in the Bovis interims to 30^th June 2015, with record completions (1,525 v 1,487) and an average sale price up 10% to £264,200 (partly due to mix). Analysts are worried that this year is more second half biased than usual, but after the hiatus of the May election that shouldn’t be too surprising. It is already difficult to recall just how fevered the fears of a Miliband/Sturgeon regime were. Anyway, in these numbers, revenue grew 9%, pre-tax profits at £53.8m were also up 9%, eps were up 11% at 32.1p and the dividend was up 14% at 13.7p. The consented land bank added around a net one thousand plots in a year and is now 19,081 (so over five current year’s production), with a further 23,287 strategic plots. All this has been achieved with net debt rising from £45.3m to a still very modest £58.8m. Their aim is to grow to production steadily to reach a range of 5,000 to 6,000 per annum and then hold those levels. The group is spreading out from the south-east, but is still heavily weighted towards that area, which as we all know, is the hot-house of the imbalanced UK economy.

In a very early blog, in August last year, I was positive on Bovis at 840p, but worried about how much further they could travel (with the General Election hurdle still to be negotiated). The shares might be down today, but at 1150p have clearly been a good investment. Consensus forecasts for FY2015 are for eps of 100p, which is a modest PE of 11.5x. The company has forecast the dividend at 40p (so well covered at 2.5x), for a yield of 3.5%, whilst FY2016 should see double-digit growth in eps and dividend. Further out, the board is targeting a 33% payout ratio, with any surplus capital being used to fund “additional dividend payments”. We all know that the UK housing market is cyclical, but we seem to be in a very long and strong cycle at the moment. Rising mortgage rates may be the biggest cloud on the horizon just now, but on these share valuations I find it difficult to conclude anything other than Bovis being a strong hold, despite the 35% plus share price rise over the last year. (Neil Cumming^, 17^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower