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Vistry - sales and margins back on track

Nicholas Hyett, Equity Analyst | 7 September 2021 | A A A
Vistry - sales and margins back on track

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Vistry Group Plc Ordinary 50p

Sell: 1,200.50 | Buy: 1,201.00 | Change 5.50 (0.46%)
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Vistry reported first half revenues of £1.3bn, up 91% year-on-year and 4.3% ahead of 2019. Results compared to pre-pandemic levels reflects strong growth in Vistry's partnerships business, which works with housing associations, where revenues in mixed tenure projects has risen 74.5% since 2019.

Compared to 2020, gross margins improved considerably. That reflects the non-recurrence of coronavirus disruption experienced last year and growth in higher margin mixed tenure projects. Together with increased sales, underlying operating profits rose from £21.2m a year ago to £175.5m.

The group announced an interim dividend of 20p per share, whereas no dividend was announced at the half year stage in 2020.

The shares rose 5.5% in early trading.

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Our view

Housebuilders have emerged as unlikely pandemic winners. Lockdowns and tax breaks lit a fire under would-be buyers and demand has skyrocketed as a result. While there's still a chance that we 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.

Management have shifted focus from cash preservation to ramping up completions. This strategy makes sense, but there's no guarantee the accommodative environment can continue. House prices are up 7.1% year on year according to Halifax, and at a certain point affordability will inevitably 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. In particular the introduction of more mixed tenure projects, which combine private ownership with social housing, have boosted margins while still providing large fixed volume projects. With demand for social and affordable housing only likely to increase we see Vistry's position here as highly attractive and a source of sustainable growth for years to come.

The group's balance sheet is in a reasonable place too. The group expects to report average month end net debt of less than £125m for the full year, and to increase net cash to £225m at the year-end - both improvements estimates made six months ago.

Long term, the UK housing market looks attractive. 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

  • Price/Book ratio: 1.08
  • 10 year average Price/Book ratio: 1.13
  • Prospective dividend yield (next 12 months): 5.2%

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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Half Year Results

Completions rose 76% year-on-year to 5,351, which also represented 5% growth on 2019. The revenue growth from pre-pandemic levels was driven entirely by Partnerships, and particularly mixed tenure. Average selling prices for Vistry's homes rose 2.4% to £301,000.

The group has reported some construction material inflation, but these have so far been more than offset by higher house prices.

Forward sales currently stand at £3.0bn, up from £2.7bn a year ago, including 96% of planned 2021 housebuilding units. Forward sales growth was particularly strong in the mixed-tenure partnerships business, which rose 34.8% to £527m.

Vistry added 5,642 plots to the landbank during the half, taking its overall landbank to 42,033 plots. The group also added 4,660 plots to its strategic land bank. Total cash spending on land reached £171.3m, up from £84.0m last year.

Despite the increased land spending, the group delivered free cash flow of £61.7m, compared to an outflow of £86.3m this time last year. The group finished the half with net cash of £31.6m, compared to £357.3m net debt 12 months ago. However, land creditors - money Vistry has promised to pay for land but isn't included in net debt - rose to £376.0m from £323.2m at the start of the year.

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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.