Bovis/Galliford: house party

“Safe as houses” is how Greg Fitzgerald, the bullish chief executive of Bovis Homes, might describe his purchase from Galliford Try. Bovis will take hold of the keys at Galliford’s Linden Homes and Partnerships divisions with a mix of cash and shares worth £1.1bn, it confirmed on Thursday. Having run Galliford for almost a decade before joining Bovis, Mr Fitzgerald should have a good idea of what he is buying.

He is paying 7 times operating earnings to propel Bovis to number four position in the UK, putting up 10,000 homes a year. That valuation is roughly average for a UK housebuilder and a bit cheaper than Bovis itself at about 8 times.

But to make this deal more than just some bolt-on earnings, Mr Fitzgerald needs to grow the group’s enlarged partnerships business — housebuilders teaming up with local authorities and housing associations. With Britain facing a housing shortage, and generous government incentives, it is a promising niche.

This will help boost Bovis’ efforts in that arena: last year the Galliford partnerships division delivered more than 3,000 units. Unfortunately, operating margins in this wing are weak at just 5.6 per cent. Doubling those to Bovis’ targeted 10 per cent will require a greater mix of land-led developments, more capital intensive but higher margin. Even then, that profitability will lag the rest of the group.

Mr Fitzgerald does have some DIY form, having overseen renovations at Bovis since joining in 2017. Operating margins have expanded from a depressed 12 per cent to 17 per cent last year. Along with his promised £35m of annual cost savings, more development should double operating profits to £400m in two years says Berenberg.

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The worry is the signal that UK housing consolidation gives. The last time it occurred, in 2007, it coincided with the end of the cycle. In that case, Mr Fitzgerald will need the more defensive business of partnership builds to maintain a strong roof over the heads of Bovis shareholders.

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