Vistry and Countryside Partnerships have agreed to combine in a cash and shares deal. Countryside shareholders will get 0.255 of a share in the new company, and 60p in cash for every Countryside share held. This will equate to around 37% of the combined business.
Vistry is funding the cash portion of the deal with new debt financing, which is expected to be repaid within two years.
The deal comes as Vistry aims to increase its Partnerships business, which it believes "offers greater resilience to the cyclicality of the housing market, with increased earnings visibility and a consistently strong forward order book underpinned by a high and sustained level of demand for affordable housing". The increased scale of the new business is also expected to lead to cost savings of at least £50m.
The Combined Group will be led by Vistry's Chief Executive Officer, Greg Fitzgerald.
View the latest Vistry share price and how to deal
Our view
Vistry is buying smaller rival Countryside Partnerships in a £1.3bn deal. This marks a bid by Vistry to build scale, uncover cost efficiencies and batten down the hatches amid growing fears of a slowdown in the housing market (more on that later).
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.
First things first though, for all the concerns about the future, right now the housing market remains defiant.
2022 has got off to a flying start. Private sales rates and prices are on the rise and the forward order book supports the argument that demand doesn't look to be going away. Given supportive conditions, management shifted focus from cash preservation to ramping up completions. A good move in our view, with mortgages still relatively cheap and government policy supportive of lending to buyers.
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 deals slots in, and is another reason we're supportive of the move.
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 9.7% 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'd 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.
First Half Trading Update (8 July 2022)
Vistry's first half performance was 'significantly' better than expectations at the beginning of the year. Full year underlying profit before tax is expected around £417m, with margins in both Housebuilding and Partnerships to exceed targets.
Demand was 'good' across all areas of the business, with an 11% increase in average weekly private sales rate to 0.84.
Greg Fitzgerald, CEO, said: "Whilst mindful of the wider economic uncertainties, we are positive on the outlook for the Group and expect to see significant margin progression in the full year".
Higher energy prices and wages are expected to push costs 6% higher across the year. So far, that's been fully offset by higher prices on private units in the region of 5%-8%.
In the Housebuilding division, completions rose from 3,126 to 3,219, of which 2,475 were private. Forward sales were broadly flat at £1.5bn. Gross margin's expected to exceed the previous target of 23%.
Partnerships completions rose from 895 to 1,106 and the forward order book rose 63% to £638m. Demand has been 'very high' given the need for housing across a range of areas, from local authorities to elderly accommodation. The higher margin division's expected to deliver operating margin in excess of the 10% target.
The partner delivery forward order book fell slightly from £890m to £835m, with 96% of forecast revenue for the current financial year has been secured.
The group's been busy in the land market. Housebuilding secured 3,360 plots and has all of the land required for next years completions. Partnerships had similar success, securing 2,166 plots at margins toward to top end of targets.
Net cash at the end of the period increased from £31.6 m to around £115.0m. Since 27 May 2022, £28.2m worth of shares have been repurchased as part of the buyback programme.
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.