Investment Column: Stay at home with Bovis – it looks cheap

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The Independent Online


Our view: Buy

Share price: 388.7p (+7.4p)

Following the carnage of 2008, Bovis Homes has done a decent job of pulling itself together. The housebuilder published annual results yesterday which showed that its revenues remained broadly flat, but its profits came in at £4.8m – not only a significant improvement from last year's shattering loss £79m, but also at the top end of the City's expectations.

Bovis has plenty going for it, including a healthy balance sheet which has been bolstered by the £221m of cash generated last year, and a strong land bank. At just over 12,000, the number of plots held is slightly lower than a year ago, but it is still an impressive asset. Bovis is also buying land again, with four sites acquired in the last quarter of 2009 and a further 15 on the way. The state of the housing market is more important, however. Today's survey from the Royal Institution of Chartered Surveyors suggests that steady improvements in property prices are likely to flatten off again as more homes come on to the market, so the outlook for the immediate future remains cautious. But in two or three years, assuming that the market eventually returns to normal levels, housing supply will be restricted because of the recent dramatic slump in construction, and that means good news for Bovis.

We still have reservations, though. Firstly, uncertainty about the housing market may give the company a rough ride in the short term. Secondly, mortgage availability is still not what it might be, which adds an extra brake to Bovis's growth. Thirdly, Britain's incipient economic recovery remains anaemic. Many of the current "green shoots" are watered by the weakness of sterling, which has no immediate impact on housing and leaves the economy exposed to the possibility of a "double-dip" recession.

In Bovis's favour, it is trading at a big discount. Panmure Gordon's estimated net asset value per share is 565p, which tips the balance in favour of a buy.

Tullett Prebon

Our view: Buy

Share price: 308.8p (-15.9p)

Inter-dealer brokers such as Tullett Prebon thrive on volatility; volumes rise as markets convulse, driving up business. While there has been a lull in activity of late, with the banking sector seemingly on a firmer footing than it was two years ago, the prospect of a second sovereign credit crunch should boost Tullett Prebon's business in the year ahead.

However, yesterday's full-year results showed a slowdown in the company's underlying revenue run rate, which fell 5 per cent during the first two months of the year. Taken on its own, that figure seems worrying; to some investors, it may imply that Tullett is running out of steam. But in our view, in the context of the outlook for sovereign debt, it is more likely to prove a temporary pull-back. It is also worth remembering that the drop was in line with what the City expected (and was certainly no worse).

Elsewhere, the valuation only bolsters the investment case for Tullett Prebon, whose shares trade on a multiple of 7.5 times Panmure Gordon's estimates for the full year. That puts the stock on a 16 per cent discount to its historic price-to-earnings multiple, according to the broker. Compared to its peers, Tullett trades at a unjustifiable discount of 25 per cent. The market is being too bearish, so we say buy.


Our view: Buy

Share price: 323p (+13p)

After a particularly brutal downturn and continuing fears of a double-dip recession, Britain's headhunters have found it very tough going. Yesterday, the third-largest recruitment specialist, SThree, reported its results for the three months to the end of February. Despite a fall in profits, its cautiously upbeat message sent the shares up.

The agency, which places staff with small- to medium-sized businesses, saw its gross profits fall by 27 per cent year-on-year to £36m, while the number of companies with SThree contracts fell by 22.4 per cent to 3,906. Yet according to SThree, the first quarter is historically pretty quiet for the recruitment market. Its directors added that it had a number of deals in the pipeline which "indicate that the group is experiencing improvements across most markets".

SThree's international expansion is coming, with Germany particularly attractive and a second Australian office due to open in Perth. The chief executive, Russell Clements, said the market showed "meaningful signs of improvement in the first quarter", but admitted it was not easy out there.

Collins Stewart rates SThree's price-to-earnings ratio at 21.7 times its estimated 2010 earnings, falling to 15.2 times its 2011 earnings. Despite the downturn, SThree has £40m in cash and continues to pay divvies, with a 3.9 per cent yield expected this year, in line with 2009. Buy.