Deutsche Bank upgrades Bovis Homes, lifts target price

Analysts at Deutsche Bank upgraded their recommendation on Bovis Homes from 'hold' to 'buy' on expectations that the company would succeed in improving its returns on capital and what they believed was potential significant upside to its dividend policy.

Deutsche Bank also revised its target price on the stock higher, from 980.0p to 1,135.0p.

In their opinion, the homebuilder´s land bank suggested 3 percentage point upside potential to gross margins, which together with actions to cut overhead costs could drive its operating margins back towards 20%, the sector average.

Bovis was also capable of moving back to 4,000 completions "relatively quickly".

Together, those measures could result in 30% upside versus the broker's forecasts for fiscal year 2018 operating profits, which implied returns on capital employed moving quickly above 20%.

As regards Bovis's dividend, Deutsche Bank estimated the outfit could generate £24m of net cash in 2018, equating to 18.0p per share.

Returning that to shareholders could lift the dividend to 63.0p, or 85.0p in an upside scenario, with potential asset sales adding a further 75p per share.

"For those willing to trust mgmt’s ability to build to cost and timing, land bought since 2011 should drive ROCE >25%. While investors wait for the higher ROCE land to feed through, improving asset turn through land sales, WIP reductions and sale of 'shared equity' should drive scope for quicker improvement to 20%, and with the combination of upside to forecasts closer to 30%."