ii view: Vistry refocus on affordable homes triggers share price boom

First-half results to 30 June and strategy update

• Adjusted revenue up 31% to £1.78 billion
• Pre-tax profit up 2.6% to £114 million
• Average weekly sales rate of 0.86, up from last year’s 0.84
• Net debt of £329 million, down from cash of £115 million
• New £55 million share buyback programme to start in November

Chief executive Greg Fitzgerald said:

"The scale of the social need for affordable mixed tenure housing across the country continues to increase and it is clear that Vistry is uniquely positioned as the leader in partnerships housing.

"Delivering on the acute social need for housing across the country and increasing the availability of affordable, sustainable homes is at the core of the Group's social purpose and vision, and I look forward to delivering upon this exciting and unique opportunity for Vistry."

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ii round-up:

Housebuilder Vistry Group (LSE:VTY) today announced first-half results alongside plans to merge its private housebuilding division into its partnerships business, which builds affordable homes in cooperation with organisations such as government bodies and housing associations.

Sales and profits for the six months to the end of June were in line with management expectations, with its planned new focus on affordable homes potentially underpinning the return of £1 billion to shareholders over the next three years via ordinary and special distributions.

Shares for the FTSE 250 housebuilder rose by more than 15% in UK trading having come into this latest news up by just over a quarter year-to-date. That compares to gains of around a tenth at traditional housebuilders Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.) and a near 2% fall for the FTSE 250 index itself. 

The partnerships business enjoyed good demand during the period, with revenues rising 7% to £954 million and operating margin climbing to 11.5% from 10.2% a year ago. That helped counter a near one-third fall in sales at its more classic housebuilding business to £824 million, and a drop in margin to 19.8% from 22.4%.

Vistry will now focus on its high return, capital light, resilient partnerships model, which is expected to result in a significant release of capital as assets from the housebuilding division are redeployed into partnerships.

The elimination of average net debt over the medium term is now a key priority, while other targets include a return on capital employed of 40% and annual revenue growth of between 5% and 8%. 

The average weekly sales rate for the half-year rose to 0.86 from 0.84, with relationships such as those with local authorities at its partnership business aiding sales for the housebuilding division.

A further £25 million of cost savings from last year’s £1.25 billion acquisition of Countryside Properties are expected to be generated, with returns to shareholders now being made via share buybacks and a new £55 million programme due to start in November. 

ii view:

Vistry Group was formed following the purchase by Bovis Homes of Linden Homes and its partnership and regeneration businesses in January 2020. After acquiring Countryside Properties in 2022, today the company's £3.1 billion stock market value sits below Berkeley Group Holdings (The) (LSE:BKG) at £4.2 billion and above Bellway (LSE:BWY) at £2.5 billion. 

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For investors, the merging of its traditional housebuilding business leaves its without the likely upside for such an operation during a potential housing market recovery. Costs broadly for businesses remain elevated, environmental considerations for the wider homebuilding industry continue to warrant consideration, as does the potential for rising unemployment, impacting the bill paying ability of renters and homeowners alike.  

On the upside, a move towards the more resilient partnerships business against the current challenging economic backdrop offers increased defensive appeal. Cost savings via its Countryside acquisition are being squeezed, net debt is expected to be eliminated, while the group’s differentiated business model sets it apart from traditional housebuilders. 

In all, and while some caution remains sensible, expected shareholder returns of around £1 billion over the next three-years are likely to keep existing shareholders happy and attract interest from new investors. 

Positives: 

• Differentiated business model
• Significant medium term share buyback programme

Negatives:

• Reduced business diversity
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold