ii view: Galliford's construction arm suffers

Construction and housebuilding group Galliford cuts dividend but talks with Bovis resume.

Full-year results to 30 June 2019

• Revenue down 8.6% to £2.86 billion
• Pre-exceptional profit before tax down 17.6% to £155.5 million
• Profit before tax down 27% to £104.7 million
• Total dividend for the year down 25% to 58p per share
• Potential Bovis purchase of housing businesses for £1.075 billion

Chief executive Graham Prothero commented:

"The group has continued to perform well and our talented teams across the businesses have delivered a good performance despite the challenges faced.

"We continue to make great progress in Linden Homes, focusing on the benefits of standardising our range and rationalising process. Partnerships & Regeneration has continued its excellent performance with both revenue growth and margin expansion, as we increase our delivery of affordable new homes. Construction's result for the year has been impacted by challenges with both legacy and some current projects and by the restructure, which is now complete.

"The potential combination of our Linden Homes and Partnerships businesses with Bovis Homes represents a superb opportunity, enhancing the prospects for all three of our businesses to thrive as strategically focused and well-financed operations with excellent opportunities for growth.  The transaction allows Construction to continue trading as a standalone well capitalised business."

ii round-up:

Galliford Try (LSE:GFRD) is currently both a housebuilding and construction business. 

Having failed to agree on price earlier this year, rival Bovis Homes Group (LSE:BVS) has now tabled a second higher offer in an attempt to buy Galliford's housebuilding and regeneration businesses.

For a round-up of this approach, please click here. 

Galliford's full-year results, coming only one day after the renewed Bovis approach, came in below management's previously lowered estimates.  

Pre-tax profit dropped 27% to £104.7 million, below management's guidance range of between £112.7 million and £116.4 million. 

Largely relating to contract difficulties and restructuring costs for its construction business, exceptional items totalled £50.8 million. 

Construction revenues dropped by 18% to £1.38 billion, with a profit last year of £15.9 million falling to a pre-exceptional loss of £15 million, given the write down of several contracts. 

The group's Linden Homes division reported reduced revenues as both build completions and average selling prices contracted, while its Partnerships & Regeneration made solid progress as it pushed higher margins for its mixed-tenure builds. 

The restructuring of the construction business is now complete. 

ii view:

With rival housebuilders having long ago separated their housing and construction businesses, Galliford Try has for some time stood against the crowd. A second bid approach from Bovis Homes to acquire its housing businesses suggests its time as a joint construction and housebuilding business could now be limited. 

Bovis's interest appears to underline its determination to make a deal work. Bovis gains economies of scale, an expanded geographical footprint and a move into the generation markets. Galliford strengthens its finances and adds emphasis to its refocusing. 

For investors, a share offer gives the chance of a foothold in each camp and the potential benefits which each could generate. We believe a wait and see approach looks sensible. 

Positives: 

• Restructuring of construction business completed
• Construction business now simplified and focused on core sectors of building, water & highways
• A deal with Bovis potentially creates two better positioned businesses

Negatives:

• The dividend payment down 25%
• Construction is a highly competitive business
• Brexit uncertainty overhangs the housing market

The average rating of stock market analysts:

Buy