Bovis boss eyes 'significant step up' in profits

Builder Bovis Homes said it expects to deliver a significant step up in profitability in the first half as management's new strategy begins to pay off.

The FTSE 250-listed group had been struggling with issues around build quality with a scandal blowing up over previous management's hurried attempts to complete houses and customers given incentives to move into properties that were still far from finished.

With these problems now firmly behind the company, chief executive Greg Fitzgerald, the ex Galliford Try boss who was brought in to turn the business around, said the first half finish in a "disciplined and orderly" fashion, with customer satisfaction score continuing to trend at well above 80%.

In the six month to 30 June, Bovis completed 1,580 new house sales, up 4% on last year, with average private prices flat at £335,000 and total average prices down 5.9% to £261,000. The sales rate for the half was up 8% to 0.52 net private reservations per site per week from 0.48 a year ago.

Seeing housing market fundamentals as "robust, with good demand for new homes" across the group's regions and underlying pricing remaining firm, Fitzgerland said this put Bovis in a "strong position" to deliver full year targets.

"We expect to deliver a significant step up in profitability for the half year as we start to see the financial benefits from the strategic direction, changes implemented, and specific margin initiatives launched over the past 18 months," he said.

Fitzgerald has set medium-term targets including a 23.5% gross margin and 25% return on capital employed.

There were 17 new sites opened in the period, with an average of 86 active sales outlets during the half, with a further six new sites to launch in the next quarter.

For 2019, 98% of units have been secured of which 92% have detailed planning in place, while terms have been agreed for around 1,200 plots on a further four open market sites and three strategic conversions.

The half ended with a net cash position of circa £40m, helped by the exit from two private rented sector JV's, including two bulk disposals. The plan to deliver a total of at least £180m of additional cash by the end of 2018 was said to remain on track.

Shares rose initially but by midday were down 0.5% at 1,116p.

"The group is re-shaping itself and this makes it hard to make useful comparison," said analyst Robin Hardy at Shore Capital, with the average selling price down as many of larger house types were axed as they were selling too slowly. "The focus is entirely on re-building and then extending margins."

He also questioned whether Bovis was it was the "right things to do" to sell assets to pay dividends. "If the board believes that it can re-shape the business and the product to raise gross margins by over 1000bps perhaps they should be deploying that unlocked capital back into the business rather than paying it out."

He added: "The big question here remains whether one believes that the initial margin restoration to 23.5% gross by FY2020F can be delivered into stiffening market headwinds and, more pertinently, whether to promise of an addition >500bps of gross margin can be delivered through optimisation. We see that the former is possible although tough, but have always been very sceptical on the latter."

Analyst Neil Wilson at Markets.com said: "As the market has looked a little trickier and it seems profitability may have peaked [for the housebuilding sector], investors have become less impressed by excessive executive pay."

He added: "Bovis has put the issues around build quality and contractors well and truly behind it. Chief executive Greg Fitzgerald said the group expects 'a significant step up in profitability' as the changes wrought over the last 18 months starts to feed through to the bottom line."