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Vistry - more optimism in housing

Nicholas Hyett, Equity Analyst | 9 July 2020 | A A A
Vistry - more optimism in housing

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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: 1,117.50 | Buy: 1,118.50 | Change 6.50 (0.59%)
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Vistry's pricing has remained "firm" during lockdown, and in the last four weeks the group's average number of private sales per site per week was increased to 0.62, or 0.5 excluding bulk sales, compared with the 0.58 Vistry achieved last year.

Across the business Vistry's sites are running at around 90% of pre-Covid efficiency, in some cases working extended hours to meet demand.

The shares rose 2.4% 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 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.

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 may be facing at least a few months of 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. If the worst happens the sector may need to aggressively control costs while living off its reserves for a bit.

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 the economy fails to recover, Vistry could face serious challenges.

Vistry key facts

  • Current 12m forward price to earnings ratio: 7.7
  • Average 12m forward price to earnings ratio since listing (March 2014): 13.2
  • Prospective yield - 5.1%

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Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First half trading update

Vistry Partnerships' developments business delivered 489 mixed tenure units, down from 574 last year, at an average price of £233k. This generated £84m in revenue, down from £94m last year. Meanwhile, the contracting business, where the group builds under contract for third parties, saw revenue fall from £244m to £213m, although the number of equivalent units rose from 1,140 to 1,250. The Partnerships contracting forward order book stands at £920m, level with January, and the developments division has £393m in mixed tenure reservations.

Vistry's Housbuilding arm completed 1,235 homes during the period, down from 3,371 last year. Of these, 975 were private and 260 were affordable, representing as shift towards private homes. The group's private average selling price was £329k, and was £290k in total. The division generated £344m in revenue, down from £854m last year. The forward order book stands at £1.26bn including joint ventures.

The Partnerships division acquired 725 plots and has conditionally contracted on a further 420. The housebuilding business bought 1,815 plots and conditionally contracted on 823. The group continues to make progress with planning permission at the Collingtree site, and gained permission on 640 plots at Salisbury.

Vistry's net debt has fallen from £476m in May to £355m on 30 June, ahead of where management had expected to be. The group has committed banking facilities totalling £770m and has access to the Covid Corporate Financing Facility if need be.

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.