Bovis Homes Group plc

Bovis Homes Group PLC (BVS), is a residential construction company. The company identifies, acquires, develops and sells residential properties. The company’s portfolio of properties includes one-and two-bedroom coach houses and apartments, three storey townhouses, four-and five-bedroom family homes, retirement living, social housing and partnership housing. The company delivers various projects in the key areas of land acquisition, engineering, purchasing, construction, planning, legal, design, surveying, sales and marketing, public relations and customer service. It caters to both private and public sector clients.

Financial Highlights (FY2018, £’000)

(Source: Annual Report, Company Website)

The company’s reported revenue increased from £1,028.2 million in 2017 to £1,061.4 million, due to the increase in all the business segments but except for the land sales business. Gross profit stood at £230.9 million, an increase of 25.04 per cent as compared with the previous year. Gross margin was 21.8 per cent in 2018. The reported operating profit rose from £121.2 million to £174.2 million in FY18. The operating profit margin climbed by 3.9 per cent to 16.4 peragainst 12.5 per cent in 2017. Net financing charges were £6.1 million and Net bank charges stood at £2.7 million. Profit before tax surged by 47 per cent to £168.1 million as compared to £114 million in 2017. Reported profit for the year attributable to ordinary shareholders climbed from £91.3 million in FY2017 to £136.6 million in FY2018. Basic earnings per share for the year 2018 were 101.6 pence as compared to 68.0 pence in 2017. This has resulted in a return on equity of 13 per cent (FY17: 9 per cent). The company’s dividend per share was up by 115 per cent to 102 pence against the 47.5 pence reported in 2017.

Share Price Performance

Daily Chart as at May-08-19, after the market closed (Source: Thomson Reuters)

On 8^th May 2019, BVS shares closed at GBX 1,069, down by 1.384 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,260.88/GBX 817.16. The company’s stock beta was 0.85, reflecting lower volatility as compared to the benchmark index.

Valuation Methodology


Key Risks
The company’s inability to collect rent form its tenants would weaken its financial condition significantly. In the adverse event of a default by any tenant, the company would face delays and costs in implementing its rights as a landlord under the terms of its leases. Increasing manpower costs may have a negative effect on the company.

Conclusion
While broad-based challenges can be seen ahead of the group, given the current trading levels which indicate the stock movement towards 52-week high with support coming from growth drivers like increased revenue mainly because of strong performance in all the division except land sales division and increased profits.The company is impacted by Brexit uncertainties but still had been able to meet expected sales expectations. However, a positive outlook for the residential construction industry in the UK, increase in population and housing prices in the UK and strategic growth initiatives are likely to provide growth opportunities for the company. Based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of GBX 1,069 (as on May 08, 2019), based on 10.5x Price-to-Earnings (approx.) on FY19E Earnings Per Share (approx.).
 

Custodian REIT PLC

Custodian REIT Plc (CREI) is a Leicestershire, the United Kingdom-based real estate investment trust (REIT). Its property portfolio includes retail, industrial, office, retail warehouse and office properties. The company holds a portfolio of the UK commercial property, diversified by sector, location, tenant and lease term.

Financial Highlights (H1 FY19, £’000)

(Source: Interim Report, Company Website)

The company’s reported revenue surged from £16.7 million in H1 FY18 to £19.6 million in H1 FY19. Operating profit before financing and revaluation of investment property increased by 16.15 per cent to £15.7 million as compared to £13.6 million in H1 FY2018. The reported operating profit before financing rose to £18.6 million in H1 FY19 from £14.8 million in H1 FY18. Profit before tax increased by 25.51 per cent to £16.6 millionagainst the £13.2 million in the first half year of the financial year 2018. The basic and diluted earnings per share stood at 4.3 pence, an increase of 13.16 per cent as compared with the H1 FY18 data of 3.8 pence. The property portfolio surged through the investment of £27.7 millionin seven acquisitions, one refurbishment and one development. The group’s dividend per share climbed to 3.275 pence. Profit generated on the disposal of 3 properties was £4.3 million for a total consideration of £15.4 million.

Share Price Performance

Daily Chart as at May-08-19, after the market closed (Source: Thomson Reuters)

On 8^th May 2019, CREI shares closed at GBX 114.20, up by 0.351 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 123.27/GBX 111. The company’s stock beta was 0.19, reflecting lower volatility as compared to the benchmark index.

Valuation Methodology


Key Risks
The principal risks are related to the United Kingdom commercial property market, the concerns raised from the tenants and the investors. Other risks faced by the company include financial, economic, management and control, strategic, operational, and regulatory risks.

Conclusion
Custodian REIT PLC has a robust business model and strong financials. The strength of the company is blue-chip tenants for the prime retail warehouse assets, and this also represents the opportunities with strong rental growth in rent review and lease renewal. However, the group is also exposed to a variety of risks, particularly a hard Brexit and sterling's fall against major currencies. In view of this and growth catalysts with valuation done using above methodology, we have given a “Speculative Buy” at the closing price of GBX 114.20 (as on May 08, 2019), based on 16.93x NTM Peers Average Price-to-Earnings (approx.) on FY19E Earnings Per Share (approx.).
 
*All forecasted figures have been taken from Thomson Reuters.

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