Bovis Homes
It was perhaps Bovis Homes’ misfortune to report some perfectly respectable halfway figures on the day that JP Morgan’s equity strategists suggested that housebuilders’ shares were likely to be outpaced by the property companies.
This sent the sector into reverse, Bovis falling 23p to 813p. The housebuilder, which is focused on the higher-priced southeast market but has only one site within the M25, is one of those that are keener to grow rather than push out spare cash to investors by means of special dividends.
The yield on the shares, then, though a decent enough 5.5 per cent, is a little below some of the big payers, such as Berkeley Group. Bovis reckons to be one of the few to have more than doubled its output through the financial downturn, having tapped investors in 2009 to buy more land at low prices.
That growth, though, means that the company sees lower margins and a lower return on capital than some of its rivals. Its position in the market in the southeast, where production has in the past been constrained by a lack of skilled labour and costs have risen, also depresses those returns.
One analyst suggests that Bovis could, at the present rate of growth, increase volumes by 20 per cent and profits before tax by more than 50 per cent over the next three years, which is undeniably impressive. The half-year figures certainly showed an 18 per cent rise in operating profits to £63.9 million on a 5 per cent rise in completions. There are signs, though, that the company is becoming cautious.
A handful of land purchases agreed before the referendum vote have been renegotiated at more attractive prices. Bovis is raising the returns it expects on land bought to provide a buffer in case the market turns down. It had guided towards opening 35 to 40 sites this year; the outturn is likely to come in at the lower end of this range or even below it.
Land purchases have outstripped the number of completions in recent years. They are lagging behind at present. All this seems sensible because, given the traditionally quiet summer market, it is too soon to forecast the future direction of the market. I suspect, though, that those higher-yielding stocks will outperform.
MY ADVICE Avoid
WHY The strategy of growth rather than returning capital will show benefits, but the market may favour higher-income stocks for now
Foresight Solar Fund
National Grid’s policy is to carry out routine maintenance in the summer months, when demand is lowest, which makes sense if you are a gas-fired power station but understandably can be inconvenient if you run a solar power farm. There was consequently the odd disruption in the summer months at the 338MW of capacity owned by Foresight Solar Fund and the performance of those assets undershot expectations, but this is nothing to worry investors who are more interested in the 6 per cent dividend yield the shares offer.
Foresight floated in October 2013. Its purpose is to recycle the income from those solar farms to investors. The fund reckons it has found a pipeline of 200MW of capacity up for sale as such assets look less attractive to their owners.
It has a £40 million debt facility available to fund some of this, but the purchases will require another issue of equity to those investors. This should not concern them either, because the shares will go out at a discount to the present share price, up 1½p at 102¾p. That yield remains perfect for investors seeking a guaranteed income, while any new shares should be welcomed.
MY ADVICE Hold
WHY The above-average yield is guaranteed
Lookers
Andy Bruce, the chief executive of Lookers, says that he cannot remember a time when there have been as many small car dealerships on the market as at present. There are a number of reasons for this.
There may be family succession issues. The regulation on selling financial products is becoming more onerous. Increasing inquiries over the internet favour companies with a larger presence there.
All this plays well with companies such as Lookers, which last week raised £120 million from the sale of its car distribution side to spend on acquisitions. The first arrived yesterday, the £55.4 million purchase of Drayton Group, seven Mercedes-Benz outlets mainly in the Midlands.
A second is imminent, though not before Lookers announces halfway figures tomorrow.
The returns to be won on selling cars, new and used, are rather better than merely distributing car parts, which accounted for about a fifth of profits at Lookers, so that new income will swiftly offset any earnings dilution from the disposal. Car dealers’ shares, like those in housebuilders, have been badly hit this year, and especially since the Brexit vote, because they are seen as being exposed to the UK economy and any fall in consumer sales.
Lookers shares have fallen by a third since the start of the year, though they added 3¾p to 129¼p on yesterday’s deal. They therefore change hands on eight times this year’s earnings, and that fall looks overdone unless you take a very gloomy view of the UK economy.
MY ADVICE Buy
WHY There are gains to come from acquisition activity#
And finally . . .
Ithaca Energy was described by one analyst as the “poster boy” of the oil exploration and production sector, and there was not a lot wrong with the halfway figures: output ahead of guidance and a further fall in operating costs. The shares have quadrupled since the start of the year, the key being its Greater Stella field in the North Sea, where Premier Oil, another strong performer, has a minority stake. Production will finally start in November after delays. Ithaca has also been snapping up a few other promising assets in the area.