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Bovis Homes first-half profits fall but shares rise on new CEO's turnaround plan

Last updated: 10:00 07 Sep 2017 BST, First published: 07:53 07 Sep 2017 BST

Bovis Homes
Bovis Homes plans to lift the 2017 dividend by 5%

Bovis Homes Group PLC (LON:BVS) reported a drop in first-half profits after setting aside money to fix poor quality homes it built and paid advisors to assess takeover bids it had received.

But shares jumped 8.71% to 1,141p in early trading after the company said it would raise its dividend this year and next due to its “confidence in the outlook" under new chief executive Greg Fitzgerald, who has been hired to overhaul the business. 

Pre-tax profit in the six months to 30 June fell 31% to £42.7mln from £61.7mln a year earlier, as it set aside a further £3.5mln to repair faults in some of its properties.

The company has put aside a total £10.5mln since it emerged last December that it was rushing the completion of homes to meet sales targets and providing customers incentives to move into unfinished properties that had issues such as serious electrical and plumbing faults.

Bovis said today it will have fixed the problems with its faulty homes by the end of 2017.

The build-quality scandal had cost the company its chief executive, David Ritchie, and resulted in a profit warning and a hit to production.

Total completions in the first half fell 6% to 1,512 from 1,601 as a result.  

Bovis also spent £2.8mln on advisory services to assess offers from Galliford Try plc (LON:GFRD) and Redrow plc (LON:RDW), which it ultimately rejected and instead hired Fitzgerald to turnaround the business. 

READ: Bovis Homes names former Galliford Try boss as new CEO as it rejects a merger with the smaller rival

Other key issues that Bovis highlighted over the first half were sector-wide labour constraints, which it said led to a “decline in build and customer service standards, an underinvestment in people and infrastructure, processes becoming overly complicated, and a lack of hands on management”. 

Revenue rises on house price growth, 2017 dividend to be hiked

Despite the issues, revenue rose 4% to £427.8mln from £412.8mln, supported by an improvement in average selling prices by 9% to £277,400 from £254,500.

Bovis left its interim dividend unchanged at 15p per share as net debt ballooned to £32.4mln from £7.6mln.

The group plans to raise the ordinary dividend for fiscal year 2017 by 5% to 47.5p per share and by a further 20% in 2018 to 57p.

By 2020, it intends to move towards an ordinary dividend twice covered by earnings.

"A higher dividend (+5%) is another sign of confidence as is the commitment to increase this by 20% next year," said Neil Wilson, chief market analyst at ETX Capital.  "On top of this a special dividend worth 134p a share over the three years to 2020 is hugely appealing."

Wilson added: "Divide 134p by 3 and add to the 57p ordinary dividend promised next year gives investors total dividends of just over £1 in 2018, which on a stock trading at 1,145p today is very appealing."

Bovis streamlines its business 

As part of its restructuring, Bovis expects to deliver at least £180mln of extra cash as it reduces its land investment on a number of larger sites and disposes a number of developments that are out of its core geographic area. It also plans to divest in non-returning assets, including its shared equity portfolio.

"The first half of 2017 has been a period of stabilisation and strategic reorganisation for Bovis Homes group,” said Fitzgerald.

“Since joining the business in April 2017 I have visited all our offices and the vast majority of our developments, and have been hugely impressed by the desire of our dedicated staff to address and rectify the challenges faced by the business.”

Bovis expects completions to grow by 4,000 per year as it streamlines the business to operate from seven regions instead of eight.

The company has started the second half with 96% of 2017 sales secured. It has also seen a “good pick-up” in sales during the quieter months of July and August with an average net private reservation per active site per week of 0.5 over the past nine weeks, compared to the 0.48 achieved in the first six months.

Strategic plan well-received

"The new strategic plan will be well received as it makes clear that new management sees the landbank as well bought and its operational issues as fixable," Liberum said, adding that the plan has the potential to drive a three-year compound annual growth rate of 17% per year and a yield of 8% per year. 

George Salmon, equity analyst at Hargreaves Lansdown, said he thinks the new strategy seems "sensible enough".

"However, it seems fairly apt that the new CEO’s plans include instilling a culture of ‘getting it right first time’. The tailwinds in the sector, namely the combination of low interest rates and supportive government policy won’t last forever.”

Numis raised its rating on the stock to 'buy' from 'add' and raised its target price to 1,275p from 1,085p, citing the benefits of the strategic review and its plans to return excess capital to shareholders. 

"In our view the strategic review is wide ranging, but we take comfort from comments such as; all business problems are fixable, the excess cash will be extracted and
returned and that returns will move toward the sector average."

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