A company in a turnaround situation enjoys internal drivers for growth which are often independent of what is happening in the wider market.
This helps explain why Bovis Homes (BVS) commands a higher valuation than many of its mid-cap peers in the housebuilding sector as industry veteran Greg Fitzgerald continues his successful restructuring of the group.
GOOD RECEPTION FOR RESULTS
The question is whether the gap between Bovis and its rivals is now too wide. Today’s first half results are getting a very good reception from the market as it reports pre-tax profit up more than 40% to £60.2m on just a 1% increase in revenue.
The shares are up 3.6% to £11.73 as the numbers suggest an approach of focusing on quality rather than quantity is having the desired effect.
Prior to Fitzgerald’s arrival and under his predecessor David Ritchie the company was hit by profit warnings, compensation payments to customers for defects in their new homes as well as opportunistic takeover approaches from rivals Galliford Try (GFRD) and Redrow (RDW).
VALUATION DEBATE
In the view of Shore Capital analyst Robin Hardy, the restoration of Bovis’ fortunes is now more than priced in.
‘The main problem with Bovis is valuation. The shares are trading on close to double the PE of the midcap peer group even out as far as FY2020 (when much of the promised improvements in trading will have already been delivered) so the rating seems to be assuming that Bovis will be able to deliver substantially more than the big promises it has already made.’
Canaccord Genuity’s Aynsley Lammin agrees the stock looks expensive relative to rivals but comments: ‘Shares continue to sit at a premium to medium-sized peers but they do offer good visibility with the turnaround and attractive special dividends.’
