Following the previously announced cost issues in its South division which led to profit downgrades in October, Vistry initiated an independent review. As a result, a further £50mn of hits to underlying pre-tax profits have been identified, spread over the current and following two years.
Average weekly sales rates since 1 July were 0.73, up from the prior year’s 0.54, but well below levels seen in the first half.
The group expects net debt at year-end to be lower than the prior year’s level of £88.8mn.
Full-year completions are now expected to be around 17,500 (down from more than 18,000), with average selling prices similar to the prior year.
Due to the additional Southern cost issues and lower expected completions, full-year underlying pre-tax profit guidance has been lowered by £50mn to around £300mn.
The ongoing three-year £1bn shareholder return target is now under review.
The shares fell 15.3% in early trading.
Our view
After an independent review of operations in its South division, Vistry announced that the impact was worse than previously expected. As a result, profit expectations over the next three years have been lowered. Alongside some other issues, this year’s underlying pre-tax profit guidance has been downgraded by £50mn to around £300mn.
It’s no secret that Vistry’s been chasing faster-than-average growth since its transition to a Partnership giant. But the scale of recent profit downgrades raises serious questions about the new structure and internal controls. An independent review points to the problems being contained to one division, but Vistry will need to work hard to rebuild investor confidence.
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 frees up cash to deploy elsewhere in the business.
But that comes at a cost, as these tend to be lower-margin than ordinary housebuilding projects. And selling these houses as part of bulk deals brings more cash in the door in one go, but further lowers the average selling price, meaning there’s little room for error.
Vistry’s high volumes of affordable housing looks well aligned with the new government’s ambition to address the country’s housing shortage. But demand softened in the run-up to the government’s Autumn budget. With falling interest rates expected to be a tailwind, where demand tracks from here will be key.
The huge order book is a real asset, standing at a mammoth £4.8bn. Vistry’s huge scale allows it to negotiate harder on prices of building materials. But there are some early signs that build-cost inflation is set to creep higher in the new year, which could put further pressure on profits
Looking to financial resilience, net debt is set to fall this year, helped by the winding down of the traditional housebuilding business. Land on the books that doesn't fit the new strategy will be sold off, which is expected to help Vistry return to a net cash position by the end of 2024.
This is driving the group’s ambitious shareholder return targets. The plan is to return £1bn of cash to shareholders over a three-year period through a combination of share buybacks and special dividends. But with the recently downgraded profit outlook, we expect to see that reigned back in some way. As always, no shareholder returns are guaranteed.
Vistry operates in a corner of the housing market where demand and sales should hold up relatively well, no matter the economic mood music. But management missteps have shaken confidence in the group’s profit targets, and more bad news can’t be ruled out. While the valuation looks attractive versus the long-run average, we’d like to see concrete signs that management issues have been ironed out before getting too excited about this housebuilder.
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. Recently, two profit warnings in the space of a month have raised some corporate governance concerns.
Vistry key facts
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