Vistry’s average weekly sales rates have improved by 32% to 1.20 so far this year, driven by the increased use of discounts and buyer incentives.
The Middle East conflict has caused some upward pressure on material and labour costs, which is expected to continue into the second half.
The order book was £0.1bn lower at £4.5bn. First-half average daily net debt is expected to be higher that the prior year. However, the group expects to finish the year with a net cash position of around £100mn.
The current share buyback programme has been paused to prioritise debt reduction.
Due to the higher levels of discounts and buyer incentives, first-half profits are now expected to be “significantly lower” than the prior year. As a result, full-year underlying pre-tax profits are now expected to be around £223mn (£247mn expected).
The shares fell 10.7% in early trading.
Our view
Vistry delivered another disappointing update. Cash flow troubles have led the group to boost sales by offering deeper discounts on its houses in order to bring cash in the door quickly. But that’s contributed to a double-digit decline in full-year profit expectations. Alongside news that the share buyback programme has been paused, the shares reacted negatively on the day.
At its heart, Vistry’s Partnership model specialises in providing affordable housing by teaming up with local authorities and housing associations. These partners foot most of the bill, which in theory, frees up Vistry’s cash to deploy on more projects across the business and drive faster-than-average growth.
The government’s pledge to invest an unprecedented £39bn in affordable housing over the next decade marks a significant step up in funding. We think Vistry is better-positioned to benefit from this tailwind than many of its peers. But it’s likely to be a slow-burning opportunity rather than a quick win.
The huge order book, standing at a mammoth £4.5bn, is a real asset. Vistry’s huge scale allows it to negotiate harder on prices of building materials. This should help it navigate build cost inflation better than many peers, as knock-on effects from the Middle East conflict look set to push up material and labour costs.
Despite the long-term positives, there are still plenty of issues the group needs to iron out.
Vistry’s partnerships model tends to have a lower margin than ordinary housebuilding projects. While selling these houses as part of bulk deals brings more cash in the door in one go, it puts downward pressure on selling prices, meaning there’s little room for error.
The balance sheet isn’t in great shape either, sporting a net debt position compared to many peers holding net cash. As a result, Vistry’s slowing down land purchases and pressing pause on the share buyback programme to prioritise debt reduction, and the group’s hopeful it can return to a £0.1bn net cash position by year-end.
If cash generation remains under pressure, Vistry’s build-rate may have to slow to better manage its bank balances, which would likely see this year’s growth targets wound back. Dividend payments also remain on hold until the balance sheet is in better health, and there’s no guarantee they return this year.
Vistry looks well-positioned to benefit from government support for affordable housing over the long term. But rising concerns about margins, cash flows, and balance sheet health are rightly weighing on sentiment. With the Middle East conflict weighing on the outlook for both demand and costs, we think profitability is likely to remain under pressure in the near-term.
Environmental, social and governance (ESG) risk
Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.
According to Sustainalytics, Vistry’s management of ESG risk is strong.
It doesn’t disclose its greenhouse gas reduction initiatives, but it has set itself targets and deadlines. And its reporting of direct and indirect emissions is in line with best practice. However, there’s currently no disclosure of an established product and safety programme or disclosures around recycled material usage.
Vistry key facts
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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 LSEG. 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.