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Vistry - dividend suspended and guidance withdrawn

Sophie Lund-Yates, Equity Analyst | 25 March 2020 | A A A
Vistry - dividend suspended and guidance withdrawn

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Vistry Group Plc Ordinary 50p

Sell: 1,225.00 | Buy: 1,226.00 | Change 0.50 (0.04%)
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Vistry had been "encouraged" by the start to the year, and had not felt the impact of COVID-19 until very recently. However, in the last week the group has seen a "negative impact" on trading.

Management has suspended the dividend to preserve capital within the group.

The shares rose 1% following the announcement.

View the latest Vistry share price and how to deal

Our view

When Bovis announced it was purchasing Linden Homes (the housebuilding arm of Galliford Try) we were broadly in favour, although we thought the timing was potentially problematic. The end of Help-to-Buy and potential Brexit related disruption could make conditions difficult in the sector. Digesting a large acquisition was only going to make things harder.

However, since then the COVID-19 pandemic has transformed conditions not only in housing but across the economy. The end of Help-to-Buy and Brexit barely register by comparison.

We suspect that very few people will be in the market for a new house in the next couple of months. If a prolonged recession follows the pandemic, demand for houses may also take some time to recover. Vistry and the rest of the sector face at least a few months of seriously reduced demand, and possibly longer.

In a worst case scenario, both house prices and volumes fall, which can quickly blow a hole in profits. That's why Vistry and its peers are stressing the strength of their balance sheets. It looks like the sector is going to need to aggressively control costs while living off its reserves for a bit.

Vistry has £90m in cash and £225m in available credit, giving £315m of total liquidity. That is probably less than management would like, making cost control crucial.

Long term, the UK housing market looks attractive to us. We have a housing shortage, both political parties want to build more homes, and mortgages are relatively affordable. Ultimately, what really matters now is the length of the shutdown and the speed of the recovery. If we can get back to normality soon, then Vistry should be fine. But if current levels of disruption persist, or the economy fails to recover, Vistry could be in real trouble.

It's hard to talk about valuation for any company at the moment, and Vistry is no exception. We don't have a post-acquisition balance sheet, which makes calculating a price-to book ratio problematic. A price-to-earnings ratio is inappropriate too. Profits for the foreseeable future are virtually impossible to predict and as things stand may well be non-existent this year.

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COVID-19 update

Following the government's recent announcements, Vistry is closing all sales offices, and most office staff will be working from home. The group will also begin closing construction sites, subject to health and safety requirements.

As of 24 March, Vistry had £90m in cash, and has a further £225m in undrawn credit available. The group has £435m in net debt (debt minus cash). Suspending the interim dividend due 29 May will save around £60m.

The group has £1.35bn in housing reservations, of which £900m is contracted. The contracting business has another £800m of work in the order book, and will submit valuations totalling around £95m for work already completed in March.

In order to preserve capital the group is stopping all discretionary spending on land and will use government support where available.

Due the widespread uncertainty caused by COVID-19, Vistry is suspending all previous guidance.

Find out more about Vistry shares including how to invest

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.