Bovis Homes Group (LSE: BVS) said this morning that the group’s pre-tax profit rose by 15% to £61.7m during the first half of the year. The interim dividend has been lifted by 9% to 15p and net debt fell by 86% to a negligible £8m.
Slowing sales?
Despite this apparent progress, Bovis shares have fallen by 3% today. One reason for this may be that the firm’s sales rate appears to be slowing. Sales so far this year have averaged 0.59 reservations per site per week. The equivalent figure for last year was 0.61.
The slowdown seems to have been particularly marked since the end of June. Bovis said that sales rates since 1 July have “trended at around 0.5”, compared to 0.58 during the comparable period last year. During 2014, however, the equivalent figure was 0.45.
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Why has Bovis resorted to such vague wording for this year’s sales, when it provided a precise figure for both the last two years? My opinion is that the company could be trying to put a positive spin on a slowdown in sales.
Profit margins under pressure?
I’m also concerned that Bovis is simply a less profitable business than some of its peers. The group reported an unchanged operating margin of 15.5% for the first half of this year.
In contrast, Taylor Wimpey (LSE: TW) reported a first-half operating margin of 19.2%. Persimmon (LSE: PSN) expects to report an operating margin of more than 23% for the same period.
Rising land and construction costs meant that margins were always going to flatten out at some point. But after several years of strong margin growth, I feel this could be a turning point for the market.
Cash and dividends
If the housing market does start to slow down, it will eventually affect all housebuilders. But shareholders of companies that haven’t managed to build up big cash piles could suffer bigger and more rapid losses.
Bovis reported strong cash generation during the first half, enabling the group to reach the end of June with net debt of £8m, versus £56m last year. However, Bovis remains in debt, giving the company no buffer with which to fund dividends if the market slows down.
Full-year consensus forecasts for a dividend of 43.1p per share give Bovis a prospective yield of 5.3%. But this is lower than both Persimmon (6.4%) and Taylor Wimpey (7.3%).
Persimmon’s dividend looks particularly strong to me. The group had £462m of cash at the end of June, and has committed to return £2.76bn to shareholders by the end of 2021.
While there’s no guarantee that Persimmon’s plans will be affordable, I think the group’s stronger balance sheet and much higher profit margins are likely to provide shareholders with more protection from a potential slowdown than at either Bovis Homes or Taylor Wimpey.
Are these shares a buy?
Bovis, Taylor Wimpey and Persimmon all trade on a 2016 forecast P/E of between 8 and 9. All offer high dividend yields. But market conditions appear to be increasingly uncertain. In my view, this isn’t the time to buy.
