LON:VTY | Bovis Homes - CEO Grasping The Nettle

7th Sep '17 by VegPatch

2 comments 3370 reads

Bovis Homes – grasping the nettle 1050p Mkt Cap £1.4bn

Bovis Homes unveiled a new financial plan in its interim results today. The new CEO Greg Fitzgerald, formerly the CEO of Galliford Try, who was appointed in April 2017 has acted decisively and its implementing a new plan. The essence is to shrink the business in terms of its operating units, get more control over processes, invest in training of the work force, weed out inefficiency and increase the quality of the product. The net effect of this is to see improved financial targets out to 2020. I see these as good news for shareholders and expect the share to continue to close the gap on the rest of the peer group in terms of both business performance and business valuation, assuming that the plan is at least partially delivered.

I first wrote about Bovis as a value situation in October 2016 Bovis Homes back at tangible NAV , when the Group was underperforming its own targets and also its competition in terms of sales and margins. The shares had fallen to 1x Tangible net asset value which I felt was usually a place where the downside was limited (see chart below). I used that net asset backing to purchase a position.

The longstanding CEO David Ritchie was fired earlier this year after another profit warning. The Group then received an approach from Redrow in March 2017, which was rebuffed. However this exemplified in my mind the value the industry saw in Bovis, in way that many institutional shareholders did not.

Focus on efficiency
The new CEO has put forward a sensible plan in my opinion. He wants to reduce some of the bloated capital employed in the business, in this case land held on the balance sheet. Slimming down large sites, selling off other sites which are non core, doing more with housing associations and better managing payment terms for land. The number of operating units will shrink from 8 to 7. According to the financial plan the sales of non core land should liberate cash of c£180m or 134p share by the end of 2020, which will then be handed back to shareholders as a special dividend in FY19 and FY20. The Group is also targeting at ROCE of 25%, inline with…

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VegPatch

8th Sep '17

Really strange market in housing related products. Housebuilders saying things are great, SafeStyle, Entu etc who provide rennovation products all saying market is weakening

Housebuilders saying the market is basically fine eg Barratt developments CEO said this earlier this week

Forward sales (including JV’s) up 13.8%, as at 3 September 2017 at £2,749.9m (4 September 2016: £2,416.5m) ·

Net private reservations per active outlet per average week from 1 July were in line with the prior year at 0.74 (FY17: 0.75)

The Group starts the new financial year in a good position with a strong balance sheet, healthy forward sales and we continue to see robust consumer demand supported by a positive mortgage environment. We are focused on driving further operational improvements through the business with a particular focus on margin improvement.”

However....

Interestingly Berkeley Group, the UK best housebuilder (Tony Pidgeley is an unbelievable genius at buying land) saw Chairman Tony Pidgeley and MD Rob Perrins (his wife actually - lucky her) sell £26m and £17m each of shares yesterday. These are not small director sales like £10k or even £500k but £26m and £17m. That's big Kahuna !

Safestyle, which makes doubled galzed windows and doors https://www.safestyle-windows.... has had a profit warning today stating

The Group announced on 18 July 2017 that given the uncertain market conditions and weaker consumer confidence it anticipated profit for the year would be lower than previously expected and broadly in line with 2016. Since then, the Group's order intake has declined beyond the Board's expectations. The Board believes this is due to an accelerating weakness in the market resulting from increasing consumer caution, as evidenced by the latest FENSA statistics, which show that the overall market has deteriorated further, with installations down by 18% in June and July compared to 2016

Shares are off 30% first thing (a bit of an over reaction IMHO)

So to me the housing market is being propped up by cheap mortgages. Household incomes are under pressure and consumer confidence is waning. Big ticket items struggle usually in that type of environment (see Safestyle for details)

I have small short positions in Persimmon and McCarthy &Stone. Must be careful though as they are Superstocks. Will increase them a lot if trading starts to weaken as most housebuilders are now trading on record premia to price to book values.

Cycle? What cycle ?

LeoInvestorUK

Regarding house builders, it is my belief that variations in profitability over the cycle are mostly due to an accounting technicality than real.

If I owned a petrol station on small margins and the petrol price rose I wouldn't suddenly report a jump in profits because I was now selling petrol for much more than I paid for when it was delivered at the beginning of the week. And if the petrol price fell I wouldn't report losses. Instead I would report on a replacement cost basis.

However housebuilders buy land, building materials and labour and after a significant lag sell houses. Any downturn affecting the selling prices of houses has an almost immediate effect on all of these input costs (and I suspect that most of their input costs are actually more volatile than built house values). But they will report collapses in profits at best.

On the other hand over the last few years their profits have been exaggerated as both input costs and output values have risen. Unfortunately, unlike on "Property Ladder" there is no Sarah Beeny to tell us how much (if anything) they actually made due to their efforts and how much was simply due to rising property prices.

So the questions are:
a) how much are share prices current irrationally inflated by the rising market resulting in high reported profits (if at-all)? and
b) how much will share prices be irrationally undervalued by a future falling market (again, if at-all)
c) is there a danger of long term (5 years+) falls in house prices rather than the recent cyclical experience.

Following this rationale I made a lot of money buying housebuilders in the last financial crisis, despite most of my buys being far too early and a completely unprecedented and unforeseen drop in mortgage availability and transactions.

For me, the bear case for housebuilders would be if there were long term falls in nominal house prices. It would be very difficult to report profits, pay dividends or indeed operate in those circumstances.

Regarding Help to Buy, see this: https://ftalphaville.ft.com/2017/09/06/2193292/opening-quote-mccarthy-stone-the-odd-builder-out/, but my view is that without the Help to Buy distortion the market would adjust and underlying profitability would be much the same. Of course the worse place to be is having your costs distorted upwards but not your income.

Bovis Homes - CEO grasping the nettle

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VegPatch

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