MBovis Homes Group Plc. Operates as a UK home builder of high quality homes in England and Wales, a highly competitive market. Bovis Homes serves as a high quality compounding machine, consistently increasing returns on capital invested and plenty of room for growth within its industry.
Bovis Homes Group is currently categorised as a Watchlist and not a current holding, this is purely based on the current price to valuation, the operational business is of high quality, however I believe the current price is slightly too high, patience is the key with this business!
1. Vigilant Leadership
Source: Annual Reports
- Long term incentive plans – Measures: Earnings per share, ROIC and Total shareholder return
- Annual Bonses – Measures: Earnings before tax, operating cash flow, ROIC and customer service
- CEO appointed in 2008, CFO appointed in 2015, Secretary to Board appointed in 2001, Non-executive Chairman appointed in 2013.
2. Long Term Prospects
Bovis Homes Group is a builder of high quality homes in England and Wales. Including design, building and sales of new homes both to private and social landlords.
- House Unit consumption has consistently grown over the past 5 years. Average growth = 14% unit consumption. (2015-2011) < — Left to Right.
Residential home construction is essentially bulletproof from future technological advancements, as shelter and homes are necessities and there is an evident housing shortage in the UK.
However, technological advancements are of course likely to occur within the indsutry, which may alter the way the residential construction indsutry operates.
- Embracing of alternative products (i.e. Pre-frabrication) may require a shift in the skills & traning in the indsutry.
- Builders and consumers may need to change their perceptions of the internal feel of alternative materials.
- Efficiency in design and engineering, has the potential to reduce costs for home builders including Bovis Homes.
- Market Risk – Deterioration of the UK economy through increasing interest rates or unemployment which would subsequently reduce consumer affordability and demand for houses.
- Operational Risk – Insufficient land acquired with outline consent or conversion to support housing development. This would stunt the growth of Bovis Homes in the short run.
3. Stable and Understandable Business Economics
Understandable Business Economics
Industry (UK Building construction):
The UK residential building construction industry has since recovered from previous contractions experienced over the last 10 years, this has come with some volatility to revenue growth.
In recent years, tight lending and dwindling home equity has made it difficult for consumers to obtain mortgages and consequently lowering the housing demand. Nonetheless, as economic conditions continue to prosper (since 2009) so will the housing demand.
- Continued growth in housing prices has boosted demand for renovations & repairs, whilst new home constructions have been limited due to supply constraints.
Rank In Industry:
Bovis Homes Group obtains a 2% market share (approximately).
- Total industry revenue = £ 51 Billion
- Bovis Homes Group revenue = £ 1 Billion
UK House building – Inc. (Desiging, Planning, engineering, surveying, construction and purchasing/selling.)
Barriers to entry:
* Required skills, technology and workforce. * High participation costs. * High project values. * High risks. * Limited creditable contracts. * Industry is already saturated.
Competitive Advantages: (MOATS!!!)
- Rapidly Increasing Return on Invested capital.
- Long-term growth strategy – (strategic land investment).
- Experienced leadership team.
- High capital growth geographies (south England excluding London).
- Wide product mix (diversification within industry).
- Consistently higher then average Gross Profit Margin.
The most prominent force driving demand over recent years has been the increasing availability of mortgages (lowered interest rates) and Government support (Help to buy schemes). Although, such Government support is likely to diminish in the near future, low interest rates are still significantly supporting lowered mortgage payments for new home owners.
- Bovis Homes has recorded that UK households are expected to grow by 221,000 (approximately) through to 2021.
- Greater protection has been out in place in the housing market. Including limits on debt-to-income ratios and loan-to-value ratios.)
Even with the estimated new build supply of around 145,000 in England, the housing supply is still significantly below the aggregate housing demand.
The demand and supply dynamic of the land market remains favourable for well funded purchasers and residential land can be purchased at sensible returns.
- Overall industry revenue = £ 51 Billion
- Bovis Homes Group revenue = £ 1 Billion
- Henceforth, Bovis Homes has plenty of room to consolidate market share within this industry.
Strong conversions from strategic land portfolios, Bovis Homes aims at 5-6 thousand homes per year.
4. Price to Valuation
From computing both a book value growth and discounted earnings model analysis on Bovis Homes Group Plc. Discounting the current earnings back to today’s present value using a 6% discount rate to be Intrinsically valued between £ 8 – £12 per share. Which equates to £ 1 Billion – £1.6 Billion for the entire company. The net working capital for Bovis Homes was also taken into consideration in such valuation.
Valuation Metrics: (Based on a current share price of £ 8.30)
* P/E = 8.5. * P/Book Value = 1.1. * P/Sales = 1.1. * Net working capital = £ 8 * Acquirer’s multiple = 6.4 = 16% operating earnings return.
Bovis Homes Group provides a quality business operation, with durable advantages and a long-run way for growth. However, due to the current share price being within a close proximity of the indicated intrinsic value, the company is placed within the Watchlist category and as soon as the current business market valuation declines a safer purchase can be made. A near 30% discount to the intrinsic value would be ideal for a purchase( £ 6- 7 per share approximately).
Thank you for taking the time to read this business review and investment analysis on Bovis Homes Group Plc. I hope you enjoyed reading 📖 !
Jordonlee W. Smith