BVS LN: House of Hope

The fall in the value of GBP because Brexit in the middle of last year led me to see stocks in the UK.

My thinking is the decline of GBP makes the value of assets in the UK relatively cheap than ever before.

But at that time I discovered that stock valuations in the UK are not very attractive.

Until I found Bovis Homes (BVS) in Feb17.

At that time, the decline in BVS share prices sounded an alarm to my ears.

BVS is a UK-based company, which is engaged in designing, building and sale of houses for both private customers and Registered Social Landlords. The company offers a portfolio of properties, including one bedroom apartments, two bedroom apartments, five bedroom apartments and six bedroom detached family homes. The company carries out and manages a range of housing development activities, including purchasing of the land, building of the houses and the after-care service for its customers. The company focuses on various activities, which include land acquisition, planning, legal, design, surveying, engineering, purchasing, construction, sales and marketing, public relations and customer service. The company works in partnership with house builders, local authorities, housing associations and other agencies. BVS operates throughout England, with an emphasis on the South and the Midlands and North West markets.

BVS stock prices fall after BVS announces a missed financial report from market forecasts. The company generated total revenue of GBP 1.05 bio pounds, an increase 11% y-y. Housing revenue was GBP 1.02 bio, or 12% y-y with average sales price increased by 10% y-y. However, pretax profit declined 3% y-y to GBP 154.7 mio, short of a Dec16 forecast range of GBP 165 mio. In addition, BVS, which delivered 3,977 homes in 2016, said it would slow production and lower completion target for this year in order to focus on customer service issues. BVS took a one-off charge of GBP 7 mio to cover follow up work, out of pocket expenses and compensation claims from customers.

Long story short, the company is being troubled by the bad products and raises many demands from its customers. On Feb 20, 2017, BVS lost a market cap of GBP 10.2 mio over a loss of GBP 7 mio consumer claims.

Despite all the woes experienced by this company, I found that the valuation of BVS is not expensive. At GBp 760, BVS traded at 1x BV16 and 8.47x E16 at that time. In addition, BVS’ balance sheet is very strong, in which the company has no interest-bearing debts. In my view, with such low valuations and a very strong balance sheet, BVS share is very attractive. But it was not just me who thought so. In April17, Redrow offers a price of GBp 814 for each BVS share, while Galliford Try offers GBp 886. Both compete for BVS to be combined. BVS boards, however, reject all the offers on the grounds that their proposed bid price does not reflect the true value of the BVS business. On the contrary, BVS is daring to recruit former chairman and CEO Galliford Try to become the new CEO of BVS. The board believes that an independent strategy under the leadership of new CEO will deliver greater value for shareholders. Greg Fitzgerald, who has worked for the Gilliford Try for over 30 years, has a qualified experience and is highly respected by the market. And with full confidence, he immediately bought BVS shares worth GBP 3.2 mio at GBp 922/share after being appointed as CEO.

After some time, last night BVS announced 1H17 financial statements under the leadership of the new CEO:

	1H17	1H16	y-y	% of achievement against target FY17
Revenue	427.80	412.80	+3.63%	45.20%
Gross profit	77.40	87.70	-11.74%
Operating profit	48.90	64.00	-23.59%
Net income	34.50	49.00	-29.59%	34.89%

At a glance, obviously there is nothing to be proud of in this way.

But strangely, BVS share rose 10.36% overnight after this report was announced. My guess is that the market has been too pessimistic about BVS prospects. The achievement of sales in 1H17 which is only 45.20% of the total target 2017 is quite inline if you see patterns in the past. The number of completed houses is only 1,512 units, a 5.6% drop y-y, but BVS is able to raise the average selling price by 9% y-y to GBP 277,000. Regarding the low profit achievement in 1H17, BVS has long communicated to the market that they are facing many compensation demands from unhappy consumers over the poor quality of the properties they buy and set aside GBP 3.5 mio to appease unhappy buyers over the period, on top of the GBP 7 mio already committed.

On the other hand, new CEO Greg Fitzgerald, who left retirement to take helm of BVS in Apr17, said BVS would now aim to deliver 4,000 homes every year. He also said the company would aim to grow its gross margin to 23.5% from 18% in the first half of the year. The company promised to return about GBP 180 mio to shareholders over the next three years as it scaled back its balance sheet by disposing of developments outside core geographic areas, lowering infrastructure spending and reducing its employee headcounts.

At the moment, BVS share price has reached GBp 1,161 or about 1.4x BV17. Whereas in the past decade, BVS shares traded in the range of 1.04x BV. Indeed, when compared historically, the price of BVS looks expensive.

But lately, property stock prices in the UK experienced rerating following the strong performance of property companies in UK. Currently Galliford Try is trading at 2.04x BV17 while Redrow is trading at 1.64x BV17.

But it must be admitted, unlike in the past, the current stock price reflects optimism for the performance of the new CEO. Investors should be cautious as further strengthening of stock prices requires successful execution of the CEO’s work plan. For those who are willing to wait, be welcome. For those who do not, there is no harm in taking profit. 

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.