Bovis Homes Group Plc & Barratt Developments Plc, H1 Update – 13 July 2014 

Overview

The first half of 2014 saw strong performances across all metrics announced for both Barratt and Bovis. During the period, completion and reservation volumes were substantially higher while selling prices were also up by double-digit figures.

This has led management at both house builders to revise higher their full year earnings guidance, providing a boost to the shares following months of building pressure.

Barratt Developments Group Plc

Revised management guidance for Barratt Developments sees pre-tax profits coming in at £390 million for the year, which should equate to earnings per share of roughly 30.00 pence when adjusted for tax at constant rates.

Such an outcome should serve to reduce the BDEV valuation from its current 25X 2013 earnings to a more palatable 12.9X earnings, which more accurately reflects the future growth outlook for the group.

Barratt Developments Plc Share Price 8 Hourly Intervals

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Bovis Homes Group Plc

Bovis reported a similar increase to Barratt’s in completions and expected completions for the 2014 year, which led management to revise upwards their guidance relating to margins. We calculate that, based upon the current number of completions and expected completions, earnings per share could be in the region of 75.00 – 78.00 pence for the full year 2014.

Under this scenario, the current price to earnings valuation would be likely to reduce from 17.1X 2013 EPS to just over 10X 2014, which, in our view, more accurately reflects the group’s future growth outlook.

Bovis Homes Group Plc Share Price 8 Hourly Intervals

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Combined Summary

While earnings growth for 2014 bodes well for full year cash returns (dividends) to shareholders, it has done little to alter our outlook for UK homebuilders such as BDEV and BVS. As referenced in our earlier report (UK Property – Part 1 & UK Property – Part 2) and despite this week’s positive updates, we continue to feel that the risk-reward ratio available from new or continued positions in these shares is now disadvantageous to investors.

With new mortgage regulations in play since April, which are designed to ensure against future financial instability, new mortgage approvals have fallen persistently over the final stages of Q2.

In addition, the Bank of England has now moved to slow the rising loan to income multiples which have been a key driver behind rising concern among members of the Financial Policy Committee.

Ultimately, these measures will likely continue to dampen mortgage lending over the remainder of 2014 and into 2015. While the Help to Buy scheme remains in place and should continue to aid some borrowers to access mortgage finance, it is unlikely to prove sufficient to enable UK home builders to maintain the level of growth momentum seen throughout 2013 and H1 2014.

Consequently, we prefer to look elsewhere for opportunities to leverage the supply and demand disparity in UK housing.

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