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Vistry - record profits but special dividend scrapped

Sophie Lund-Yates, Equity Analyst | 27 February 2020 | A A A
Vistry - record profits but special dividend scrapped

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Vistry Group Plc Ordinary 50p

Sell: 1,203.50 | Buy: 1,204.50 | Change 8.50 (0.71%)
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Vistry delivered record results, with underlying pre-tax profit rising 12% to £188.2m, which was ahead of market expectations. That reflects improved operating margins of 17% and higher sales.

The group announced a second interim dividend of 41p per share, in lieu of a final dividend, taking the total payment to 61.5p. Reflecting the new strategy following the Linden Homes acquisition, there will be no further special dividend payments in relation to the £180m returns plan started in 2018, of which £120m has been paid to shareholders.

The shares fell 3.9% following the announcement.

View the latest Vistry share price and how to deal

Our view

When Greg Fitzgerald took over as Vistry's (formerly Bovis') CEO in 2017 the business was plagued by quality issues. But those have since been put to bed, and the group now boasts a strong satisfaction rating. Cost saving plans and more efficient designs mean profitability is improving too.

However, the £1bn acquisition of Linden Homes, the housebuilding branch of Galiford Try, changes things significantly. The tie-up creates a top five housebuilder with a greatly expanded geographic footprint. We think the deal has much to recommend it, as the combined company should be able to find significant cost savings.

But the timing could prove awkward.

Support from the Help to Buy scheme, which accounts for 23% of Bovis' sales, is set to end in 2023, and if Brexit doesn't go to plan we could endure a nasty economic shock. Should cracks in the wider housing market grow, the whole sector could be in for a rough time. Digesting a sizable new acquisition will only exacerbate any problems that arise.

We're yet to see any integrated reporting, but the balance sheet will be of particular interest. The recent deal was funded by raising additional equity and issuing new shares in the combined group, so debt levels haven't jumped dramatically, and Vistry reported around £362m of net cash last year.

The group now trades on a valuation broadly in line with peers. A slightly more conservative dividend policy may not be the most welcome news, but we think it's a sensible move given the scale of the integration Vistry has to work through. Prior to the full year results announcement the group offered a prospective yield of 5.2%.

Overall, this is an interesting time to be a Vistry investor. If management can navigate the integration process smoothly, and the broader economy holds up, then the future looks bright. However, problems may start to appear if the housing market turns.

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Full Year Results

Group revenue rose 6.5% to £1.1bn, reflecting a 2.9% rise in completions to 3,867, of which 31% were affordable homes. Total average selling price increased 2.6% to £280,200, with the average price of private homes increasing 1% to £341,700. The average sales rate per outlet per week improved 16% to 0.58.

The forward position rate for homes has reached 48% in 2020.

Help to Buy remains "important" with 23% of total completions using the scheme, although this was a lower proportion than last year's 27%.

The group acquired 4,531 plots of land compared to 4,164 the year before. The newly acquired land is expected to achieve a gross margin of at least 26%.

Net cash now stands at £362m, up from £127m last year. The increase was partly driven by payments from joint ventures.

Looking ahead Vistry says a "strategy of significantly increasing development revenues will be reflected in a step-up of land acquisition and strategic land opportunities".

Vistry's also aiming for a dividend cover (earnings per share divided by dividend per share) of 2 times, moving towards 1.75 over time.

The group achieved a five star HBF customer satisfaction rating in 2019.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.