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Vistry - Performance exceeds expectations

The group achieved half year revenues of £1.3bn, 5.5% ahead of the prior year.

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The group achieved half year revenues of £1.3bn, 5.5% ahead of the prior year. This came from positive growth in both Partnerships and Housebuilding, up 9% and 3.9% respectively.

Gross margins are ahead of the group's expectations at 23% and ''excellent progress'' is being made towards achieving its full year target of 25%. This reflected strong house price inflation, which more than offset cost inflation, and higher margin land.

Higher gross margins and sales allowed underlying operating profit to rise 12.9% to £198.2m.

The board have announced an interim dividend of 23p, up 15% from last year. The £35m share buyback programme completed on 20 July this year.

The shares were unmoved following the announcement.

View the latest Vistry share price and how to deal

Our view

The housing market is teetering on the edge of change. With mortgage affordability coming under fire and a broader economic slowdown on the horizon, demand could start to slow.

This is partly why the market was indifferent about the half year results, despite a strong performance. The bigger story came 2 days before when Vistry announced it's buying smaller rival Countryside Partnerships in a £1.3bn deal. This marks a bid to build scale, uncover cost efficiencies and batten down the hatches amid growing fears of a slowdown in the housing market.

We think the deal has merit, especially because the debt taken on to fund it appears to come with reasonable terms and a sensible repayment horizon. As with any major deal, there is an element of execution risk so we'll be keeping a close eye.

First thing's first though, for all the concerns about the future, right now the housing market remains defiant.

2022 has got off to a flying start. Prices are on the rise and 96% of this year's completions have been forward sold already. Demand has remained stable for now. Given supportive conditions, management shifted focus from cash preservation to ramping up completions.

However, it's hard to ignore the broader economic conditions. Higher house prices and a cost-of-living crisis means buyers' spending power's being eroded. It almost feels inevitable that a softening in demand is on the horizon. Plus, costs are on the rise due to higher energy prices and wages.

Despite that, Vistry remains confident it can manage its way through the tough environment and continue to grow margins. The fact it's the Partnership business driving things forward is a positive, that reduces dependence on a strong private market. This is exactly where the Countryside deal slots in.

The Partnership business involves construction and development work with local authorities and housing associations. 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.

Vistry has some financial breathing room if the market wobbles and allows management the flexibility to reinvest in growth if it remains buoyant. That's a big "if" though, and while not at dangerous levels, the group is carrying more debt than it was thanks to the Countryside deal. Current upbeat conditions support the group's prospective 9.2% dividend yield, which has been boosted by the valuation coming under pressure recently. It's more important than ever to remember no dividend is ever guaranteed and if the environment changes, there'll be less cash available to share with investors.

Vistry offers something different to the broader sector and the valuation isn't too demanding. It's worth remembering though, housebuilders are cyclical. That means a continued decline in economic conditions would put serious pressure on 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.

Half Year Results

Total completions rose 5% year-on-year to 5,409. This reflected a growth in Housebuilding completions to 3,219, up 3%, and partnership completions to 4,325, up 7.6%. The remaining completions came from partner delivery units, which fell 18.5% to 1,084.

The average selling price for Vistry homes rose 10% to £333,000 year on year. This offset higher energy and material costs.

Housebuilding and Partnership mixed tenure forward sales currently stand at £2.3bn, up from £2.1bn a year ago, representing 96% of forecasted completions this year. Forward sales growth was particularly strong in Private Housebuilding, rising 13% to £811m.

The group had success in the land market, adding 5,526 more plots to the overall landbank, which increased to 42,869, up from 42,033 a year earlier. The group also added 1,852 plots to its strategic land bank. These increased net cash payments for land to £291.6m, a 70% rise from last year

Free cash flow had an outflow of £48.3m, compared to an inflow of £61.7m last year. The group finished the half year with net cash of £115.0m, more than triple that of last year, reflecting strong performance and average net debt falling to £73m from £239m last year.

Land creditors - money Vistry has promised to pay for land but isn't included in net debt - fell by £9.1m to £405.2m since the start of the year.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 8th September 2022