Bovis Homes turnaround on course

Greg Fitzgerald’s turnaround strategy for Bovis Homes Group (BVS) appears on track after an upbeat trading statement that confirms profits this year are in line with expectations and promises a ‘significant improvement’ to profits next year.

After seeing off a couple of opportunistic bid attempts earlier in the year, in September Bovis announced bold restructuring plans in order to return more cash to investors. Whilst Bovis had made itself vulnerable to a takeover after warning on profits, the problems it had were always eminently fixable from within. Failure to meet construction targets, poor relations with contractors – these were not fundamental issues with the business or its model. It can afford £10.5m to settle issues relating to build quality problems.

Today Bovis reports it is fully sold for 2017 completions with an average sales rate over the period (Jul 1st-Nov 10th) of 0.52, up from 0.48 in the first half of the year. The firm expects an increase in the average selling price, down largely to changes in mix and a ‘modest increase’ in underlying prices. Having faced a slew of build quality problems, it is encouraging to see the customer satisfaction score at 75%.

The company is aiming to return about £180m to shareholders over the next three years. Today’s update looks very encouraging on this front. It now expects to have a net cash position of at least £100 million by the end of the year, up from £38.6m a year before. Aiding this, Bovis pocketed £21.9m from the disposal of the group's shared equity portfolio and a further £12.9m from two land sales.

No specifics on operating margins, which had fallen way behind the industry to 15.2% last year, but the update did offer encouragement by saying the company is on track to deliver its target of overheads being a maximum of 5% of revenue from next year. In September the aim was to boost gross margin to 23.5%, from 18% in the first half.

Just as Taylor Wimpey reported yesterday, demand for new homes is strong, supported by very strong fundamentals – low mortgage rates, Help to Buy, low unemployment and lack of supply. Eyes remain on the Budget next week for any further assistance for first time buyers on Stamp Duty and Help to Buy extensions.

Shares firmed 1.5% after the release and are trading +36% over the last 12 months. By comparison, this trails the gains for Persimmon (+56%) and Bellway (+43%), but beats the c+30% gains for Taylor Wimpey and Barratt Developments.

Tesco shares jump on Booker deal green light, distraction risks remain

Deal done: Tesco shares jumped on the open after the Competition and Markets Authority (CMA) gave the green light to the £3.7bn Booker deal. So are investors really going for this deal? Despite today’s rally of +4.5%, shares in Tesco are down -10% since the deal was mooted in January.

As reported at the time of the announcement in January, it probably is a good time for some consolidation. The UK supermarket sector, Tesco especially, is exiting a recovery phase after a brutal period and there are further growth opportunities. But it’s also hugely competitive and store deflation is hitting margins, meaning anything that can be done to pare back costs in areas like procurement, supply chain, distribution and store footprint is a good thing. Discounters are nipping at the heels of the big four.

However, the 24% premium paid for Booker undoubtedly scrubs a lot of the value off the deal. The big risk seen by investors is that Tesco takes its eyes off the turnaround strategy.

The rationale for the deal is to tie up the end-to-end wholesale/retail business and generate savings in the process. Cost synergies of around £200m a year, mainly from buying and distribution, are the main selling point for Tesco shareholders. Management has said that the merger will generate a return greater than the cost of capital within two years of completion. EPS will increase in year two as well, although this excludes ‘implementation costs’. Tesco shareholders Schroders and Artisan Partners said it was too expensive and too risky.

But can we attribute the share price fall entirely to investors’ lukewarm response to the deal. The big legs lower taken by TSCO in April and June came after results failed to meet market expectations – has management been distracted? It’s hard to say, but investors should be pleased the deal now looks done and management can focus on growing market share and improving margins again. Tesco is turning the corner but it takes time to right an oil tanker. There is still the risk that the implementation of the deal will distract from the main task at hand.

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