Bovis Homes shares 'cheap' after CEO coup

It looks like the housebuilding sector will have to wait a little longer for further consolidation in an industry starved of activity for a decade, after news that a deal between Bovis Homes and Galliford Try is definitely off.

Bovis rejected Galliford's merger proposal after the Middlesex-based firm apparently failed to improve its offer terms from the original 880p. It said the offer "failed to reflect the underlying value of the Bovis business".

Galliford responded by saying it was no longer considering a combination with its Kent-based counterpart. It's the second time Bovis has seen a potential buyer walk away from a deal in the past month, with Redrow doing similar after being rebuffed in March.

It's certainly been a busy Wednesday for Bovis as, in an even more interesting development, it pulled off a coup by tempting former Galliford chief Greg Fitzgerald out of retirement to head up the business.

The 52-year-old will be well remunerated for the decision to get stuck into this new project, with an annual salary of £650,000, an annual bonus of up to the same amount and a long-term incentive plan of up to £1.3 million for each of his first two years and £975,000 thereafter.

At the time of his "retirement", Fitzgerald said it was "time to move on" after 33 years at Galliford. His comments suggested he wouldn't be out of work for long – and now he has found a new re-building project to get stuck into.

Fitzgerald, who will take over on 18 April, spoke of Bovis's "great brand, excellent people and high-quality land bank", adding he wants to "deliver significantly improved returns to shareholders". And his record over his 10 years leading Galliford suggests he stands a good chance.

Galliford reported pre-tax profits of £23 million in 2004, the year before Fitzgerald took over – by 2016 it was nearly six times that at £135 million.

Bovis had been searching for a new boss ever since former head of eight years David Ritchie sacked just weeks after a shock profits warning in between Christmas and New Year. The market didn't like that, coming only a month after it had updated with predictions of record annual revenues, increased profit and further improvement in return on capital employed (ROCE). It confirmed in February that annual pre-tax profit fell 3% to £154.7 million.

Wednesday's news has been received positively by both brokers and investors, and Bovis shares are up around 4% at 879p.

It's unlikely they'd have done so well if the job had gone elsewhere. Bovis had previously been in talks with Andrew Davies, current boss of construction firm Wates Group, about the role, which would have "underwhelmed", according to Will Jones, partner at broker Redburn.

Jones expects Fitzgerald to bring "a dynamic and enthusiastic approach" to Bovis with plenty of "much-needed industry operational nous".

Bovis also took the opportunity to give an operational update, explaining that current sales and reservations are "in line" with expectations. It says it has addressed customer service issues that arose at the beginning of the year, which has weighed on performance ever since.

2017 will see a focus on "re-setting the business" by replenishing its land bank and optimising its balance sheet in order to improve its ROCE. Any excess capital that results from this programme, the company added, will be returned to shareholders.

Bovis's land bank - the amount of undeveloped site it owns - is forecast to be 18,624 for full-year 2017, and Jones reckons that number will grow to over 19,500 by 2020.

"The prize for [Fitzgerald] and shareholders will be unlocking the group's land bank margin and ROCE potential," he concluded. "If achieved, [this] will render the current 8% premium to 2017 net asset value as cheap."

When the initial takeover interest in Bovis, which also included Berkeley, came to light in early March, shares of the firm shot up 8%, suggesting investors backed a possible deal.

However, it now seems likely the company is happy to go it alone and, as Jefferies analyst Anthony Coding said, it will be a "brave person" who bets against Fitzgerald's ability to turn its fortunes around.

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