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

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.

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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.