House-builder Bovis Homes (BVS) slips 1.4% to 829.5p despite a trading update showing the group is on track to deliver a a significant increase in profit before tax for 2013, in line with market expectations. The £1.1 billion cap reports strong performance across a range of metrics ahead of publishing full-year results on 24 February.
Highlights from today's update include a 19% rise in legal completions to 2,813 including a 26% increase in private homes to 2,330.
The strong sales performance has been further leveraged by an increase of 14% in the group's average sales price to £195,100 which has been primarily attributed to an improved mix of larger homes with a greater proportion of higher value southern sites.
Exposure to the burgeoning (some might even say overheated) southern market is putting lead in the Bovis pencil but it's the work on margin growth which shows the company in a better fundamental light.
A significant improvement in operating profit margin to close on 15%, compared to 13.3% in 2012, has been driven both by an increasing contribution from legal completions on sites acquired since the housing market downturn and by improving overhead efficiency. This, says Bovis, will facilitate 'strong growth in profitability will enable the group to achieve its anticipated material improvement in ROCE (return on capital employed) to in excess of 10% for 2013'.
Land acquisition is also continuing apace. During 2013, Bovis added 3,737 plots to the consented land bank on 27 sites. On top of that, almost 2,800 plots on 12 sites were contracted at the year end and are expected to be added to the consented land bank during the early months of 2014. By the end of 2013, the group's land bank stood at 14,638 consented plots, providing over five years of land supply at 2013 volume levels.
Analyst reaction to the pre-close statement has been largely supportive. Anthony Codling, an analyst at Jeffries, approves of the Bovis growth strategy. He says: 'The combined effect of a strong forward order book, strong landbank, growing site numbers and supportive underlying UK house price inflation (it is our view that UK housebuilders are price takers rather than price setters when it comes to average selling price (ASP), as new build ASPs reflect rather than dictate underlying house prices in the secondary market), in our view will lead to strong growth for Bovis in 2014, where we currently expect pre-tax profit to grow by 42% to £110 million in the 2014 financial year , up from £77.7 million in 2013', he says.
Deutsche's Glynis Johnson rightly points out that the latest trading update contains 'little detailed 2014 guidance' and that 'today may not prove the trigger for significant movement in consensus', but sets a target price of £10.08 nevertheless.