Bovis Homes feeling the pinch

Bovis Homes will announce its fourth-quarter revenue figures on 15 January, and traders will be cautious as the company warned that full-year profit margins would only be slightly higher this year.

Source: Bloomberg

The shortage of housing and land available for development is one of the reasons for rising house prices according to the Royal Institution of Chartered Surveyors. However, there is also a shortage of skills, and thus wages are going up ahead of the national average.

Bovis Homes had record completions in the first-half of the year, but higher labor costs and planning delays forced the company to admit that operating profit margin would be a touch higher than the previous year.

Traders were quick to get out of Bovis Homes when the warning was announced in November 2015, as the stock had risen by 270% from the 2008 low. The business is still in good shape as revenue, profits and average home selling prices are on the rise.

The new stamp duty rules will come into play in April, and is tipped to take some demand out of the property market. The macroeconomic environment still suits Bovis Homes as interest rates in the UK look set to stay at current levels for some time to come. 

The homebuilder will reveal its full-year figures on 22 February, and traders are anticipating revenue of £936 million and adjusted net income of £128 million. These forecasts represent a 15.6% rise in revenue and a 22% jump in adjusted net income. The company will report its second-half revenue on the same date and investors are expecting revenue of £590 million, and that compares with first-half revenue of £350 million.

Equity analysts are bullish on Bovis Homes, and out of the 13 ratings, eight are buys, three are holds, two are sells. The average target price is £12.10, which is 31% above the current price.

Institutions are even more bullish on Taylor Wimpey, and out of the 15 recommendations, nine are buys, five are holds, and one is a sell. The average target price is 216p, which is 12.5% above the current price.

Equity analysts are moderately bullish on Persimmon, and out of the 15 ratings, two are buys, eight are holds, and five are sells. The average target price is £20.94, which is 7.5% above the current price. 

  Forward 12M Price/Earnings Price/Book value Dividend Yield 3 Year Dividend Growth
Bovis Homes 9.71 1.39 4.43% 78%
Taylor Wimpey 12.98 2.59 1.04% 155%
Persimmon 12.27 2.77 4.88% 151%

Bovis Homes has a relatively low valuation compared with Taylor Wimpey and Persimmon going on the forward 12-month price/earnings and price/book value. Bovis Homes has a solid dividend yield although the growth rate is lagging behind its rivals.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

Bovis Homes has suffered a dismal start to year, reflecting much of the weakness seen in the broader market. However, this stock has been falling back ever since it fell short of the key long-term £12.20 resistance level (2007 high) in August 2015.

The stock has since pulled back below the 100-week simple moving average, which has occurred with increasing frequency over the past two years. On this occasion, the brevity of the preceding rally is stark and is a worrying sign.

With trendline support (currently £8.87) relatively near current price, there is a good chance that we could rebound once more to regain some of the lost ground in the past six months. However, given the potential slanted head and shoulders formation which would be formed should price break through this trendline support, there is a chance that this could represent the beginning of a wider selloff.

For this to occur, a closed daily candle below £8.64 would provide the necessary signal that further downside is likely to be around the corner.

Notable resistance levels are £10.24, £12.05 and £12.20. Conversely, a close below £8.64 would bring £7.50, £7.22 and £6.99 into view.

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