The putative offers from Galliford Try and Redrow for Bovis Homes in March when it was stricken now look very cheeky, indeed. When Redrow announced that it was walking away, the Bovis share price was below £9; it rose 33p to £11.38 after a trading update that indicated progress on all fronts away from the scandal that engulfed the company last year and cost David Ritchie his job as chief executive in January.
With hindsight, the furore over the quality of Bovis’s homes was a consequence of the continuing housebuilding boom and the need to keep up with City forecasts by cutting corners and paying buyers to move in early. In a more orderly market, it probably wouldn’t have happened. The £10.5 million that Bovis has set aside over a two-year period to put right those quality failings is, in the context of a company expected to make pre-tax profits of more than ten times that this year, of little consequence.
Greg Fitzgerald arrived as chief executive in April just as those potential bidders shuffled away and in September set out the route away from the company’s troubles along with the halfway figures. He said that the “operational issues”, those quality failings, were all fixable. The solution will involve reaching a four-star level of customer satisfaction, which comes down to correcting those problems that had much to do with poor control over subcontractors.
To placate upset shareholders, Mr Fitzgerald needs to run the business more efficiently and to ensure that cash can pile up to fund the payment of £180 million of special dividends, or 134p a share, over the three years to 2020. The ordinary payment will increase by 5 per cent this year and 20 per cent in 2018.
Meanwhile, the rate of home completions, about 1,500 in the first half of this year, will have to climb back again to about 4,000 a year. The corresponding increase in operating margins, 15.2 per cent in 2016 to 18.5 per cent by 2020, will put Bovis back alongside the sort of returns seen elsewhere in the sector.
In the trading statement, Bovis was in the positive side of the housing industry, after good updates from Taylor Wimpey and Galliford Try and more negative ones from Persimmon and Redrow. There is no sign of the feared fall-off in demand in the autumn and sales per week, per outlet are ahead of last time.
The cash is piling up, as are the cost savings. Bovis said that it should have £100 million in the bank by the end of the year, about twice the best estimates in the market, aided by some timely property sales.
Of those disposals, £12.9 million came from the land bank as the company moves towards having only three and a half to four years of expected output in the bank, or 14,000 to 16,000 plots, while at the halfway stage that number stood at more than 19,000. That target is significantly less than its rivals hold, but is more appropriate for a capital-light structure aimed at maximising returns to investors.
Bovis shares are more than a pound higher than their peak before the fall across the sector after the referendum. In terms of the price-to-net asset value, they lag much of the rest of the sector, but that additional return to investors puts them on the best yield.
For the present year, on the payout already promised, the dividend yield is 4.2 per cent. For 2018, after the promised extra payment kicks in, the yield is a bit more than 9 per cent. Those payments look assured.
ADVICE Hold
WHY The prospective dividend yield is a high one, but does not kick in until next year, even if Bovis’s problems do all appear behind it
Computacenter
The winds are all blowing in the right direction for Computacenter, one of Britain’s top listed technology companies by market value and a big player on the Continent.
The Hertfordshire-based company, which supplies hardware and services to enterprise customers, upgraded its guidance yesterday for the third time this year, saying that it now expected full-year results “comfortably in excess” of previous expectations. It confirmed a promise to return £100 million to shareholders and added that it would do this in the form of a tender offer, or buyback.
In an unexpected twist, however, it pushed back the tender offer from its original date of the fourth quarter of 2017 to January 23 next year, the day after the release of its full-year trading update. Analysts at Megabuyte suspect that the company is waiting for greater clarity on the extent of the profit outperformance and might increase the amount to be returned to shareholders.
Some investors, aware of the company’s history of generous buybacks and special dividends, thought so, too, and the shares rose 8.8 per cent to £10.75.
Computacenter, which has a market capitalisation of £1.3 billion, is benefiting as its customers double-down on digitalisation of their businesses and processes in an investment cycle that some analysts expect to last at least another year or two. The company probably can expect a further bump in business in the run-up to January 2020, when Microsoft finally withdraws mainstream support for its Windows 7 software and users who have not already done so upgrade to Windows 10.
Spending on tech upgrades is not the kind of investment companies enjoy, so they want to do it in the most cost-effective way. That’s why Computacenter sells itself as a cost-reduction business. It’s a strategy that is paying off, particularly in Germany, where continued strong growth is driving its outperformance, and to a lesser extent in France.
In Britain, where customers include Channel 4, Crest Nicholson, Dairy Crest and the Department of Education, sales are growing after a long restructuring process. Taken together with strong numbers from Softcat, its rival, the Computacenter results are a proxy for the overall rude health of IT spending in the UK, which shows no signs of weakening, despite Brexit.
ADVICE Buy
WHY The valuation is low for the company
