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Vistry - trading ahead of expectations, profit guidance upgraded

Sophie Lund-Yates, Equity Analyst | 17 May 2021 | A A A
Vistry - trading ahead of expectations, profit guidance upgraded

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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: 1,198.00 | Buy: 1,199.50 | Change 3.50 (0.29%)
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Management now expects underlying pre-tax profits of around £325m, up from the £310m previously guided. That reflects "strong" trading in the first half of the year.

As previously announced, Vistry will pay final dividend of 20p per share.

The shares rose 2.1% following the announcement.

View the latest Vistry share price and how to deal

Our view

Housebuilders have emerged as unlikely pandemic winners. Lockdowns lit a fire under would-be buyers and demand has skyrocketed as a result. While there's still a chance that we could see an economic hangover from the pandemic, the housing market appears to be on stable footing for now.

Worries about the shifting Help to Buy scheme proved overblown as Vistry's average monthly sales rate blew past 2019 levels despite having transitioned to the new system. Add to that the government's commitment to propping up 95% mortgages, and you have a housing market that's cooking with gas.

Vistry confidently raised its profit guidance for the full year as management shift focus from cash preservation to ramping up completions. This strategy makes sense, but there's no guarantee this accommodative environment can continue. House prices are up 6.7% from the start of the pandemic. Compare that to a 5.4% increase in wages over the past year, and affordability becomes a question mark.

Rival housebuilders have noted rising materials and labour costs in their most recent updates. For now, this isn't much of an issue for Vistry, whose existing procurement contracts have tempered the impact. However, it's worth considering that if this trend continues, it would pinch margins. Wider inflation could also see an interest rate increase from the Bank of England, making affordable mortgages harder to come by and potentially hitting the housing market hard.

Fortunately, Vistry's Partnership business, which does construction and development work with local authorities and housing associations, would offer some relief in that scenario. Partnerships' robust growth throughout 2020 despite the setbacks was encouraging. The group has ambitious long-term plans for the division, and if they come to fruition the group should be in an attractive spot.

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 is the shape of the economic recovery off the back of the pandemic. If things continue on as is, then Vistry should be fine. But any shocks to the economy could chip away at strength in the housing market and leave Vistry on unstable footing.

Vistry key facts

  • Forward Price/Earnings ratio: 10.7
  • 10 year average Forward Price/Earnings ratio: 11.3
  • Prospective dividend yield (next 12 months): 4.2%

All ratios are sourced from Refinitiv. 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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Trading Update

Since the 1 January, the group's sold an average of 0.75 homes per outlet, per week, which was up from 0.44 last year, and 21% above 2019 levels. The group has transitioned to the new Help to Buy scheme and is seeing "good" demand so far.

Housebuilding completions are on track to deliver around 6,500 units this year, ahead of internal expectations, and with an underlying gross margin of 22%. The forward order book is worth £2.7bn, covering 83% of Housebuilding and Partnerships' full-year forecast units.

Between 1 March and 14 May, forward sales in Housebuilding rose 13.7% to £1.5bn. That reflected growth in all categories excluding Affordable Joint Ventures, which declined slightly. The division's secured 94% of land required for 2022 completions with 3,230 plots across 13 developments, worth £145m.

In the same period, forward sales increased slightly to £448m in Partnerships. The division now has 98% of the land required for 2022 completions. Partnerships is making "progress" toward its 2022 targets - revenue of £1bn and operating margins of at least 10%.

Partner Delivery forward sales declined 8.1% over the period to £808m, which covers 92% of the group's forecast full-year revenue.

So far this year, the group has secured over 1,350 plots across 3 developments for its strategic landbank.

Average monthly net debt is on track to come in below £150m, better than management's £200m target. For the full year, the group expects to post a "much stronger" net cash position than last year's £38m.

Looking further ahead, the group said 2022 performance expectations remain unchanged.

Find out more about Vistry shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.