After 2 bids for Bovis Homes Group plc fail, which stock could be next?

Could Bovis Homes Group plc (LON: BVS) be the first of many bid targets within the housebuilding sector?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Bovis (LSE: BVS) is the latest FTSE 350 company to be the subject of a bid approach. In fact, it has received two initial proposals, both of which have been rejected. The first was from sector peer Redrow (LSE: RDW), which was rejected due to the cash element of the deal forcing Bovis investors to crystallise potential capital losses. The second bid was from sector peer Galliford Try (LSE: GFRD). It was turned down on valuation grounds, although discussions are continuing between the two companies.

Low valuations

Of course, there is no guarantee that a deal will be struck. Bovis states in today’s update that it is making good progress with its plans to recover and improve profitability. It is also in the midst of a search for a new CEO, which is progressing well. Clearly, the company has a long way to go in order to return to full financial health. Its recent update showed there are issues with customer satisfaction as well as its financial performance.

However, it may not be the case of Bovis being approached simply because it is enduring a challenging period. Across the housebuilding sector, valuations appear to be relatively low. This could create an opportunity for further bid approaches not only for Bovis, but elsewhere in the industry.

For example, sector peers Persimmon and Taylor Wimpey trade on price-to-earnings (P/E) ratios of 10.1 and 10.4 respectively. Both of these ratings are lower than the Bovis P/E ratio of 10.9. Since they offer superior prospects in the near term as well as lower risk thanks to their relatively settled management teams and strategies, they may prove to be more likely bid targets in the long run.

Uncertain outlook

Clearly, the outlooks for Bovis, Taylor Wimpey and Persimmon are uncertain. Brexit has already caused higher inflation via weaker sterling, and this could make mortgages less affordable. That’s particularly the case if wage growth fails to match the rate of inflation, which may mean that demand for new housing falls. In such a situation, the likes of Redrow, Galliford Try and other housebuilders may seek to merge with other companies in order to create entities with lower costs, synergies and a size and scale advantage over rivals.

When combined with low valuations, this means the housebuilding sector may be ripe for M&A activity. Since Bovis has already turned down two bids and seems unwilling to listen to cash offers, the likes of Persimmon and Taylor Wimpey may be more likely bid targets due to their lower valuations and more stable operating performance. Given Redrow and Galliford Try have shown their intention to grow through acquisition, it would be unsurprising for investor sentiment towards the sector to improve in the short run as the market builds a potential bid premium into valuations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Bovis Homes Group, Galliford Try, Redrow, and Taylor Wimpey. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »