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Vistry Group - guidance raised as demand remains strong

Vistry has seen no significant impact from recent interest rate rises, and the group says demand remains strong.

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Vistry has seen no significant impact from recent interest rate rises, and the group says demand remains strong. Vistry's private homes have seen prices rise 5-8% in the year-to-date. As a result, full year underlying profit before tax is expected to be at the top end of market forecasts, of around £415m.

Vistry signed the government's fire safety pledge and expects further remediation costs of £35m-£50m. The work's also expected to cost £1.5-£3.0m in additional administrative expenses per year.

Greg Fitzgerald, CEO, said: ''Materials supply issues have eased and whilst we continue to see build cost inflation in line with previous assumptions, this is being more than offset by price increases.''

The shares rose 3.6% following the announcement.

View the latest Vistry share price and how to deal

Our view

Higher interest rates don't seem to be dissuading buyers from snapping up houses - the strong forward order book and sales rates underpin that.

While there's a chance broader economic conditions could come and take the wind out of the housing markets sales, 2022 has got off to a flying start with private sales rates and prices on the rise - the housing market appears to be on stable footing for now.

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. Mortgage rates may remain high for now, but with speculation about further hikes, it almost feels inevitable that a softening in demand is on the horizon.

When you add in cost inflation the picture ahead gets cloudy. For now, Vistry remains confident it can manage its way through the tougher environment and continue to grow margins. However, that's largely reliant on house prices remaining elevated. There's a limit to how high they can go before affordability weighs on demand and puts pressure on prices to move the other way.

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 has been 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. Vistry's net cash position has been growing and average month end net debt is seen falling in 2022. This should give the group some breathing room if the market wobbles, and allow management the flexibility to reinvest in growth if it remains buoyant. It also helps support the group's prospective 9.3% dividend yield, which has been boosted by the group's valuation coming under pressure recently. It's more important than ever to remember no dividend is ever guaranteed and if the environment changes, there'd be less cash available to share with investors.

Some level of demand is a given in the UK housing market. The UK has a housing shortage, both political parties want to build more homes, and mortgages are still relatively affordable. Vistry's partnership arm offers something different to its peers and could hold the group in good stead should the private property market lose steam.

The valuation isn't too demanding, but reflects the uncertainty that lingers. Housebuilders are cyclical, meaning an overall decline in economic conditions would be bad news for the entire sector.

Vistry key facts

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.

Trading Update

Cost inflation is expected to run at around 6% for 2022, with energy costs higher than expected, but supply chain pressure is expected to ease.

The group's total forward sales position stands at £2.5bn, compared to £1.9bn seen around this time last year. 83% of total forecast units for 2022 have been secured. The group sold 0.86 homes per outlet, per week, up from the 0.75 reported last year.

Housebuilding forward sales stand at £1.8bn, up from £1.5bn last year. The division secured 2,750 plots across 13 developments, and now has 95% of the land required for 2023 completions.

Partnerships forward sales total £722m, up from £391m last year. The division bought 1,666 mixed tenure plots across 8 developments in the period and has 87% of the land required for 2023 mixed-tenure completions.

Partner Delivery forward orders rose from £808m this time last year, to £860m.

The group expects month end average net debt to come in below the previous target of £100m.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 18th May 2022