Bovis Homes: Good progress and a 10% yield

An upbeat statement appears to guarantee the dividend, but could there be even greater riches elsewhere?

The Brexit-resilience of UK housebuilding stocks was in evidence again today as Bovis Homes (LSE:BVS) offered income-seeking investors significant reassurance on current trading.

The encouragement from the high-yielding member of the FTSE 250 index follows an "excellent" first half of 2019, buoyed by a slightly better-than-expected 4% rise in sales volumes and improvement in average selling price.

Margin pressure also appears to be moderating, with Bovis the first builder this summer to highlight an easing of the 3% to 4% cost inflation seen earlier in the year. And in a further boost to the wider housebuilding sector, Bovis said there was no sign that Brexit uncertainty was damaging demand for new homes in any of its operating regions.

Shares in Taylor Wimpey (LSE:TW.), Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) were all 1% higher today, while Bovis was flat at 1,011p after surrendering an initial 3% post-update surge.

Numis Securities thinks the shares have the potential to reach 1,375p, which would better the record level achieved in May 2018. Its forecasts are based on a projected 2020 dividend yield of 10.5% as Bovis completes a plan to return surplus capital totalling £180 million or 134p per share in the three years to 2020.

The yield is underpinned by further balance sheet progress, with Bovis saying today it is on track to achieve more than £250 million in additional cash flows from the initiatives it set out in 2017, significantly above the original £180 million target.

It is also seeing a marked upturn in customer satisfaction, with the Home Builders Federation benchmark currently trending at a five-star rating compared with the two stars seen in 2017 when Bovis was rocked by complaints over its build quality.

Under the leadership of Greg Fitzgerald, who took over as chief executive in April 2017, the company has re-focused on "controlled volume growth, price optimisation and margin enhancement". In February, this meant better-than-expected profits growth for 2018 of 47.4% to £168.1 million alongside a 20% increase in the dividend to 57p a share.

 Source: TradingView Past performance is not a guide to future performance

The progress appears to have been sustained in the first half, with a 15% increase in the weekly sales rate and a 3% rise in the average selling price to £270,000. While there's been little movement in house prices amid Brexit uncertainty, builders including Bovis continue to benefit from favourable trends on mortgage affordability and an ongoing shortage of new build homes.

Fitzgerald said today:

"We start the second half with a strong forward sales position and expect to deliver an improved performance in 2019."

He made no mention of May's failed attempt to buy Linden Homes from struggling rival Galliford Try (LSE:GFRD). Bovis had planned to issue new shares in order to fund the proposed £950 million offer, which also targeted Galliford's partnerships and regeneration business.

In a note today, Numis analyst Chris Millington said it was encouraging to see Bovis making progress across all aspects of its business.

He added:

"Overall, this is a good update and the maintenance of a strong sales rate means the group is reserving in line with our medium-term volume ambitions."

While Millington said Bovis shares were attractive at a price to net tangible assets ratio of 1.24x, UBS analyst Greg Kuglitsch said he believed there was better value in some other mid-caps such as Bellway (LSE:BWY) and Redrow (LSE:RDW).