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Vistry - Sites powering back up

Nicholas Hyett, Equity Analyst | 20 May 2020 | A A A
Vistry - Sites powering back up

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: 1,202.50 | Buy: 1,203.00 | Change 7.00 (0.59%)
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Vistry Partnerships is currently operating on all 73 of its contracting sites and 31 out of 34 development sites. The housebuilding arm is operating on 119 out of 172 sites. Over 5,600 people have returned to work across the various sites in the business.

After suspending the interim dividend management has decided on an alternative means of returning capital to investors. The group will allocate 4,369,992 shares to shareholders on the register as of 27 December 2019. Shareholders can then choose to sell these new shares if they wish. The issue is valued at £60m using the closing share price on that date of £13.73. The scheme is dependent on shareholder approval.

The shares fell 3.3% 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.

The recent return to work is welcome, but it does mean the group will no longer be saving money on wages under the governments furlough scheme. Efficiency will likely improve as workers become more accustomed to new social distancing measures on sites, but the Vistry is unlikely to reach its prior levels of productivity. This makes it all the more crucial that the group can keep selling its houses profitably.

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. Positively, Vistry has managed to keep selling during the lockdown, albeit at a reduced rate. However, despite some encouraging signs, the whole sector is probably facing 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 may need to aggressively control costs while living off its reserves for a bit. Vistry's net debt has grown recently, as might be expected, but the group does still have large committed banking facilities to draw on if need be.

Long term, the UK housing market looks attractive to us. The UK has 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.

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Trading update

The Partnerships business has led the return to work because the pre-sold nature of these sites means they offer a more reliable source of cash flow. Over 70% of normal productive capacity has been restored and the contracting forward order book stands at £827m.

Over the past eight weeks Vistry's Housebuilding arm has taken 447 gross private reservations, falling to 300 net of cancellations. The group legally completed 257 private sales during the same period. The group's private sales rate has improved in the last three weeks, averaging 0.26 per outlet per week. Pricing has been in line with forecasts and website traffic indicates firm demand. The forward order book, including development projects from the Partnerships business, stands at £1.5bn including joint ventures.

Management is "very pleased" with its progress integrating recent acquisitions, and expects to realise over £44m in cost savings. This will come through reduced headcount, the cost of which is expected to fall within the £35m already budgeted.

As of 18 May Vistry had net debt (debt minus cash) of £476m, up from £440m on 21 April. The group has committed banking facilities totalling £770m, and maturities are spread out to 2027. The group is eligible for the governments COVID Corporate Financing Facility, but has not used it as yet.

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.