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Vistry - underlying progress

Emilie Stevens, Equity Analyst | 8 September 2020 | A A A
Vistry - underlying progress

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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: 1,203.50 | Buy: 1,204.00 | Change -37.00 (-2.98%)
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Vistry's first half adjusted revenue increased by 40% to £660.9m, reflecting the impact of the Galiford Try acquisitions. On a pro-forma basis adjusted revenue fell 45%. Adjusted operating profits fell 72% to £21.2m.

The group now expects to generate £44m in synergy benefits from the acquisition, up from £35m previously, £20m of which is expected to be realised in 2020.

Vistry's pricing has remained "firm", and the group's average sales rate since 1 July has increased 20% to 0.73 sales per active sit per week. Management expects full year profit before tax to be between £130 and £140m, and thinks the group can make "at least" £310m in 2021.

Management aims to reintroduce the dividend in 2021.

The shares fell 3.1% 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.

Since then the COVID-19 pandemic has transformed conditions not only in housing but across the economy. And just when you thought it was safe to go back in the water, the end of Help-to-Buy and Brexit are starting to rear their heads again.

The group now operates from two main segments, Housebuilding and Partnerships. The housebuilding business is fairly straightforward - buy land, build houses, sell houses. Vistry Partnerships does contract construction and development work. The combination makes Vistry a bit different to its competitors, and the Partnerships business does a lot of work with local governments which may provide some support in a downturn.

The group is now carrying more debt than we'd like, but management says they will prioritise this in the next year or so, which is reassuring.

Both operating segments were hit hard by the pandemic, but are now back at work. Production capacity is now close to normal levels, which is good but may cost more as employees are being asked to work overtime.

Fortunately, prospective homebuyers seem to be coolly indifferent to the pandemic. House prices have stayed firm and pent up demand has been unleashed now nationwide lockdowns are over. This may not last forever though, especially if the economy fails to recover smoothly and we enter a sustained recession.

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 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: 7.2
  • 10 year average 12m forward price to earnings ratio: 12.8
  • Prospective yield: 3.8%

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 results

Vistry Partnerships' developments business delivered 489 mixed tenure units, down from 574 last year, at an average price of £222k. This generated £88m in revenue, down from £94m last year (pro forma). Meanwhile, the contracting business, where the group builds under contract for third parties, saw revenue fall from £223m to £244, although the number of equivalent units rose from 1,140 to 1,310. The Partnerships division generated £12.4m in adjusted operating profit. The contracting forward order book stood at £920m on 30 June, but has since fallen to £815m.

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. The group's private average selling price fell 3% to £332,000, but rose 9% to £294,000 in total. Adjusted revenue for the division fell 26.1% to £349.4m, down from £854m last year (pro forma). The forward order book (including joint ventures) stood at £1.26bn on 30 June, but has since risen to £1.48bn on 4 September. The division generated £8.5m in adjusted operating profits, down 89.3%, reflecting lower revenue, lower gross margins and normal overhead costs.

The Partnerships division has acquired 1,320 plots in the year to date and has conditionally contracted on a further 523. The housebuilding business bought 2,086 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 started the year with £362.0m in net cash, but had £357.3m in net debt on 30 June. This reflects the costs of the acquisition and a £1.5m cash outflow from operations (before land payments). The group has committed banking facilities totalling £770m, and 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.