Bovis has pledged to put customers “at the centre” of what the company does. Previously they were on the periphery as the UK housebuilder rushed to meet sales targets, judging from social media photos of shoddy fixtures and gaping holes in new build homes. Such short-sightedness triggered a profit warning and cost the chief executive his job. New boss Greg Fitzgerald must boost margins in a tougher housing market.
Piquantly, Mr Fitzgerald is a former chief executive of Galliford Try, a rival that just abandoned a bid for Bovis. Aside from appeasing homebuyers he must placate those shareholders who would have preferred a deal to go through. Shares in the cyclical housebuilding sector are six times higher since 2009. Bovis shares have only doubled.
One reason is that margins of 16 per cent have slipped low compared with 19 per cent for Redrow — another would-be purchaser — and Persimmon at 24 per cent. The backdrop is a UK housing boom fuelled by subsidies from a government that favoured popularity over economic logic.
The boom would make the admission of failure implicit in a dividend cut harder to take. Bovis’s payout has risen by a whopping 55 per cent annually over the past five years. If the company repeats another 13 per cent rise in annual dividends while meeting the lower end of analysts’ earnings forecasts of 69p it will be paying out three-quarters of earnings.
Input costs are rising in response to sterling weakness and labour shortages in the south of England. More positively, Bovis should benefit from a supply-demand imbalance, a healthy UK economy and a bias towards prosperous southern England
To assuage concerns it will not repeat last year’s mistakes, Bovis has pledged to focus on quality. The company has cut projected house volumes by a tenth. Trading at 1.1 times net asset value, the shares are lowly rated. To merit his generous pay, Mr Fitzgerald needs to take them sustainably above the price his ex-employer offered to pay for them.
Lex welcomes discussion with readers. Are the underlying prospects for housebuilders as steady as we imagine? Or are they — and investors — in for a nasty surprise? Please share your views in the comments section below.