Building the case for another trade?

Apart from another dull set of figures from an insurer, this time Amlin (AML), the highlight of which was the 3.9% increase in the dividend. See the link above for full details and the insurance category to the right for more background on it. The only other thing that aroused my interest today was another set of strong numbers from a house builder. This time it was Bovis Homes Group (BVS) who reported profits and earnings up over 100% and a 200% increase in the dividend. Now of course it was the increase in the dividend which piqued my interest.

This is another well managed national house builder and they set out in the results they way they look to manage their activities over the cycle and they summarised market conditions in the first half as follows:

"The UK economy is recovering positively.  In the first half of 2014 the UK housing market has continued to perform robustly with increased housing transaction activity.  Home buyers have good access to mortgages and are confident about buying a home.  This has been supported by the greater certainty provided by the extension of the Government's Help to Buy shared equity scheme."

On the back of this and their confidence in achieving their targets for this year and next they have announced an increased interim dividend of 12 pence and an intention to pay 35 pence for the full year in 2014 and at least 35 pence in 2015. This compares to forecasts of 22.3 pence and 28.4 pence (source:Stockopedia) prior to these numbers. Thereafter, in this phase of the cycle the Board plans to operate a regular payout ratio of one third of earnings with supplementary dividend payments to shareholders of cash surplus to requirements as they move towards optimal scale. This should still mean around 35 pence though as the eps forecast for 2015 was around 100 pence any way before any changes on the back of these figures.

Other points to note are net assets of 624 pence and a pension surplus of £1m. Their optimal scale is 5000 to 6000 units a year and by managing the housing cycle they seek to maximise returns, while effectively stewarding shareholders' capital, targeting ROCE of at least 20% by 2016. The Group held 17,702 consented plots in its land bank at 30 June 2014. The average consented land plot cost at the start of 2014 was £48,900.  This has decreased to £45,900 at 30 June 2014 and compares to their average expected selling prices for 2014 of £210,000 to £215,000 forecast in these figures.

Summary and Conclusion:
Another set of strong numbers from a house builder, no surprise there, but the dividend increase was. Given the market was previously happy to put this one on a 3.5% yield based on the previous 2015 forecast dividend, you could argue for a 1000 pence price target if you applied the same yield to the new 35 pence dividend. This would also put it on around 10x the current expected earnings for that year.

Looking at the chart (see below or visit the website if you can't see it on the e-mail). it looks as though the shares have been in a trading range between 720 pence and 820 pence and they have this morning moved to the top end of that range on the back of these numbers in a stronger market which has also recovered from its recent lows. As they now look over bought you might therefore want to hold off and wait and see if it sags back into the range or finds support from its 200 day moving average at around 807 pence to confirm a bullish trend.

However, with the Bank of England back tracking on raising rates again last week and the consensus now shifting to no rate rise until next year you could argue for a continuation of the recent recovery in the price and a possible break out from the recent range. If this were to happen then technical analysts would argue for up to 100 pence of upside (the width of the range) which would also take it up towards its recent highs around 920 pence (resistance?) for a potential 13.5% return if you  include 1.5% from the interim dividend.

On the downside if you are more worried about a housing market bubble rolling over or popping then I guess chartist could see the chart as what they call a head and shoulders which if the neck line at 720 pence were to break would theoretically target 100 pence more downside or 200 pence from current levels and take the shares back to around their book value at 620 pence where I would suggest it would look very cheap and be fundamentally suppo

So as I always say you pay your money and take your choice but for my money I would be looking for this one to break out on the upside for a move towards 900 to 1000 pence in the medium term.