Building Value Brick by Brick

02/24/2010 12:01 am EST

Focus: GLOBAL

Peter Shearlock

Editor, Growth Company Investor

UK home builder Bovis is selling at a nifty discount to book value despite solid financials and an improving business outlook, writes Peter Shearlock of The IRS Report.

The shares of mid-range housebuilder Bovis Homes Group (London: BVS) are now firmly in the bottom half of their 12-month trading range, despite a bullish statement from the company as recently as mid-January. Most importantly, they are valued at a discount to net worth of between 25% and 30%.

Now there are plenty of reasons why the market should be wary of any house builder right now. Wind the clock back a year and several were teetering on the edge of bankruptcy. Then came a dramatic reassessment. A big run-up in share prices followed as the market priced in a steady recovery in the housing market.

In the past two months, however, sentiment has shifted. Growth in mortgage lending has stuttered to a halt and both the Royal Institute of Chartered Surveyors and the House Builders Federation have come out with negative reports. For all that, the latest Nationwide Building Society survey showed prices continuing to rise at over 1% a month.

While several competitors still look like the walking wounded, this is not true of Bovis. In January, the company said it had achieved completions on 1,803 homes in 2009, more than 1,200 of which were to private buyers, as opposed to housing associations or partnerships. That was a big improvement in the mix, and therefore in margin. Nearly 60% of legal completions came in the second half. At the end of the year, the company had reservations for 643 homes, compared with 425 at the same stage a year earlier. The number of private reservations increased by 82% during the year.

Bovis cut back on investing in new sites as early as 2006. Last year, it reduced working capital by cutting back on housing starts in the first half. Together with a £59-million share placing in the autumn, this resulted in a cash inflow of £221 million for the year. Bovis now has a net £113 million of cash in the balance sheet.

Cash will run down as activity levels rise again, but it gives the company the financial clout to pick up new sites. Many of these are being put on the market by banks that have foreclosed on other builders. They can often be bought at knock-down prices. Bovis has already picked up four new sites and agreed terms on 15 others. This gives it a tremendous springboard for future growth.

Importantly, Bovis has shed head count and made repeated savings in construction costs. Operating margins are currently around a lowly 6%, but Killik & Co expect the figure to regain historic levels of between 20% and 25% within three years.

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