Vistry Group Plc (VTY) Ordinary 50p

Vistry’s first-half trading update reported a rise in the weekly average sales rate from 0.86 to 1.21. This was driven by strong demand and the transition of the business to a Partnerships model.

First-half underlying operating profit is expected to rise around 10% to £227mn, helped by increased sales and lower building material costs.

Total completions in the period were up around 8% to 7,750 new homes. The forward sales position has also risen 21% to £5.2bn.

Net debt improved slightly from £329mn to £323mn thanks to improved first-half cash flows.

Full-year guidance has been maintained, with more than 18,000 new homes expected to be built, up from 16,118 last year. Vistry says it is “supportive” of Government plans to reform building planning rules.

The shares were broadly flat following the announcement.

Our view

Vistry’s transition into a Partnerships giant has helped the group put up a resilient first-half showing. In a tough market, sales rates have improved, and underlying operating profits are expected to rise by around 10% over the first half.

Partnerships specialise in providing affordable housing by teaming up with local authorities and housing associations. These partners foot most of the bill, which reduces risk and 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 reduces risk further but lowers the average selling price.

That’s exactly what we’ve seen play out. Despite an increased number of homes set to be built, the needle on the profit outlook hasn’t moved. Margins are likely to remain under pressure this year, as open-market sales look set to make up a smaller slice of the overall pie as it sharpens its focus on Partnerships.

That’s where Vistry's strategy change comes in. Increasing its scale in the partnerships space looks set to continue boosting future volumes, which should go a long way to offsetting the margin decline's effect on overall profits. And the increased size of the business has given it the bargaining power to renegotiate more favourable prices with key suppliers.

The huge £5.2bn order book is a real asset too, providing good near-term revenue visibility. Partnership revenues are typically more defensive than those from ordinary housebuilding operations. The need for more affordable private and social housing doesn't go away because economic conditions look tough.

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 within three years through a combination of share buybacks and special dividends. As always, no shareholder returns are guaranteed.

In an uncertain housing market, Vistry’s strategy shift will likely continue to help it weather the challenges of 2024 better than many of its peers. A change of Government and promises to refresh planning regulations have brought some early signs of optimism to the sector. But when mortgage affordability pressures ease and the housing market picks back up, we think other names in the sector will catch more wind in their sails.

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.

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