We continue our whistle stop tour of the UK housing sector this week with a look at Bovis Homes. Yesterday we visited Taylor Wimpey shares and asked why fund manager Neil Woodford was the largest single owners of Taylor Wimpey stock.

One of the big questions remains how well the UK housing sector is doing, and whether UK house builders are heading for a fall.

Bovis Homes shares – are they an income play?

Bovis Homes Group has seen an expansion in its profit margins over the last five years, with 22.85% average net income growth. This has beaten its 19.7% revenue growth and with a profit margin of nearly 9%, there is an implication of improving cost efficiency at Bovis Homes.

However Bovis Homes is a house builder, and its fortunes are tied to the health of the UK economy, property prices and, frankly, the ability of first time buyers to buy a home. According to Nationwide building society, UK property prices grew at their slowest pace in March vs the last seven months. Prices are still going up, but investors are starting to worry that Brexit and the prospect of further UK interest rate rises will have a harmful effect.

Having said that, the government is keen to see more homes built, and the directors of Bovis Homes seem bullish, snapping up Bovis Homes shares when it looks cheap.

Completions, revenues and profits were all down in 2017 at Bovis but the company did manage to increase its annual dividend and confirm plans for special dividends in the next three years. CEO Grant Fitzgerald says there is going to be more focus on customers (nice to know) and on the quality and timely delivery of new homes. He is keen to contain the reputational and financial damage that has dogged Bovis Homes Group.

“This has come at near-term cost to margins, but with completion numbers expected to reach new peaks in 2018, good cost control and the launch of a new range of houses, Bovis has a very good chance of improving its  return on sales levels that are nearer those of its FTSE 100 and FTSE 250 peers,” says Russ Mould, investment director at AJ Bell.

The targeted 102p/share dividend, along with the promise of a special dividend, could provide some level of support for Bovis Homes shares, which come with a higher yield against a lower book asset multiple than many peers, including Persimmon and Taylor Wimpey.

There is clearly still an imbalance between demand for homes and supply. Interest rates are still admittedly low and mortgage availability seems good, but prices are high and consumer confidence in the UK is looking soft. These are cause for concern. The number of houses built last year by the big quoted builders is now 17% above the level reached in 2007, just before the financial crisis, but average selling prices have risen by 30% across the same time frame.

The Armchair Trader says:

There is plenty of focus on the dividend payable by Bovis Homes shares. This is being raised to 57p for the ordinary dividend for 2018 plus payment of a 45p special dividend. However, offering big dividends has not done competitors like Persimmon any favours, although it has attracted big fund managers into Taylor Wimpey stock. Investors are asking themselves whether macroeconomic factors will continue to support UK house building for much longer. Many investors were burned when the UK housing sector fell apart in 2008-09. They are looking at Brexit and wondering whether we will see the same again soon.

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4th April 2018
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