In a short trading update, Vistry announced that total build costs at 9 of its roughly 300 developments have been understated by around 10%.
As a result, Vistry has wound back its underlying pre-tax profit expectations by £80mn, £30mn and £5mn for the current and following two years respectively. Vistry now expects underlying pre-tax profits of around £350mn for the full year, around 20% lower than previous market expectations.
Despite the bad news on the profit front, full-year completion volumes remain on track, with management expecting to build more than 18,000 new homes.
Medium-term targets have been re-iterated, with the group expecting annual operating profits to rise to around £800mn.
The shares fell 34.6% following the announcement.
Our view
Vistry issued a profit warning as it revealed building costs at nine of its projects in the South had been underestimated. The revised cost estimates will cause a big hit to this year's pre-tax profits, which look set to fall around 20% short of previous market expectations. The group says this incident is confined to one division in the South, and management changes are being made in the region as a result.
It’s no secret that Vistry’s been chasing faster-than-average growth since its transition to a Partnership giant. But the scale of this announcement raises serious questions about the new structure and internal controls. While demand’s likely to remain strong, we can’t rule out more management missteps as the new business model finds its feet.
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. We see the full-year guidance to deliver more than 18,000 new homes this year as achievable and the group says it has the capacity to step this up further if needed, so there are growth levers to pull.
The huge order book is a real asset too. It stood at a mammoth £5.1bn at the last count, providing good near-term revenue visibility. Vistry’s huge scale allows it to negotiate better prices on building materials, ultimately helping profitability.
Looking to financial resilience, Vistry's slipped into a net debt position, but winding down the traditional housebuilding business should help on this front. Land on the books that doesn't fit the new strategy is set to be sold off and 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. This looks stretching to us, especially given the recent profit warning. As always, no shareholder returns are guaranteed.
Vistry operates in a corner of the housing market where demand and sales should hold up well, no matter the economic mood music. But management missteps have shaken confidence in the group’s profit targets, and we see the potential for more downward revisions in the near term. At this moment, other names in the sector look more appealing.
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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