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Vistry - a strong housing market boosts performance

William Ryder, Equity Analyst | 7 July 2021 | A A A
Vistry - a strong housing market boosts performance

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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: 1,204.00 | Buy: 1,205.00 | Change 9.00 (0.75%)
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Vistry is confident it will deliver on market expectations of £329m in full year underlying profit before tax. This follows a first half performance which was ''significantly ahead'' of the group's prior expectations.

The group has reported strong demand ''across all business areas'' with a weekly average sales rate of 0.76 up from 0.69 before the pandemic and 0.45 last year.

The shares rose 1.4% following the announcement.

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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 8.8% year on year according to Halifax, and at a certain point affordability could become an issue.

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 as price rises are offsetting any cost increases. 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.

The group's balance sheet is in a reasonable place too. The group expects to report average month end net debt of less than £150m for the full year, and to increase net cash beyond the £38.0m recorded at the end of last year.

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 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: 9.3
  • 10 year average Forward Price/Earnings ratio: 11.1
  • Prospective dividend yield (next 12 months): 4.7%

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

In the Housebuilding division, completions rose from 1,235 to 3,126, of which 2,294 were private. As a result of such strong demand, prices have increased in every region the group operates in. Vistry's Housebuilding division saw its overall average selling price rise from £294,000 to £299,000, while the average private sale price rose from £332,000 to £350,000. Housebuilding forward sales rose from £1.3bn to £1.5bn.

Housebuilding is on track to deliver around 6,500 completions this year with an underlying gross margin of 22%.

Partnerships has delivered 895 completions, up from 489 last year. The divisions average selling price was £255,000, up from £222,000. As a result of increased higher margin mixed tenure revenue, Partnerships expects an improvement on last year's underlying operating margin of 8.7%. The forward order book for the division stands at £391m, down slightly on last year's £393m.

Partner Delivery revenue rose slightly to £226m and the forward order book fell slightly to £890m.

Vistry has been active in the land market. The group secured 4,143 plots for the Housebuilding division, 1,499 for Partnerships and 4,660 for the strategic land bank.

The group has ended the first half with net cash of £32m, compared with net debt of £357.3m last year. This is ahead of expectations thanks to strong trading and ''robust'' working capital management.

View the latest Vistry share price and how to deal

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.