Vistry issued an unexpected trading update as full-year underlying pre-tax profits are now expected to come in at around £250mn, below prior guidance of around £300mn. The downgrade is mainly due to delays in transactions and completions, which are now expected to finalise in the next financial year.
The group has also chosen not to continue with several transactions where the terms on offer were “not sufficiently attractive”.
The delayed income means that full-year net debt is expected to land in at around £200mn. The group had previously hoped to return to a net cash position by the end of 2024.
The shares fell 18.4% in early trading.
Our view
In a short trading update, Vistry warned that full-year profits look set to be worse than previously expected. This marks the third profit warning in as many months, and this disappointment is being blamed on transaction delays, which are now expected to be completed in the new year.
It’s no secret that Vistry’s been chasing faster-than-average growth since its transition to a Partnership giant. But yet another profit downgrade raises serious questions about the new structure and internal controls. 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 look well aligned with the new government’s ambition to address the country’s housing shortage. 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. But progress has been slower than expected, which raises some questions about 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 reined 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.
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
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.