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magazineCan Bovis CEO convince with recovery plan?
The new chief executive of Bovis Homes (BVS) Greg Fitzgerald has a tricky job with September’s (7 Sep) looming strategy update. Since the industry veteran was appointed in April the company has outperformed the wider sector and it is up more than 17% year-to-date, with directors including Fitzgerald loading up on shares with a cumulative value of £3.7m.
He is expected to outline his plans for a five-year organic growth strategy when he addresses shareholders in September.
The housebuilder is attempting to recover from problems which led to two profit warnings around the turn of the year, the departure of chief executive David Ritchie in January, and a £7m compensation payment to customers for defects in their new homes. It rebuffed takeover approaches from rivals Galliford Try (GFRD) and Redrow (RDW) earlier this year.
Investment bank UBS reckons ‘some optimism in Bovis’ recovery potential’ is ‘already being priced in’ and rates the stock at ‘neutral’ with a 950p price target.
MARGINS CAN IMPROVE BUT RETURNS MAY STRUGGLE
Its number crunchers say operating margins can recover to 2013 levels at 17% in the next five years but are more circumspect on the scope to increase return on capital employed to the peer group average of 21%.
Return on capital employed or ROCE essentially shows the return a business is achieving from the money it has invested (in this case mainly in the land on which Bovis builds new homes). UBS notes ‘it is difficult to change return profiles of housebuilding businesses quickly given the main drivers are the terms of the land initially acquired’.
The analysts add: ‘Bovis’ CEO indicated it is in the process of implementing operational improvements to deliver a successful turnaround, but ultimately we believe Bovis’ issues with legacy sites and its labour force will likely take time to be resolved.’
Investors should also be braced for a deterioration in financial performance in 2017. A deliberate reduction in volumes of 10% to 15% to enable quality control issues to be addressed is likely to have a relatively larger impact on profitability as some costs within the business will remain unchanged.
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