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Vistry expects margin growth

The power of the group’s partnerships divisions is starting to bear fruit
Vistry expects margin growth
  • Key metrics up on 2019 comparator
  • Partnership returns now exceed 40 per cent

With the housing market on ice for much of the first half of 2020, the 2021 half-year results season has been a flattering one for the housebuilding sector. A stamp duty holiday and unrelenting pent-up demand have only served to heighten the year-on-year surge in sales, profit, and margins.

Given the context, investors in Vistry (VTY) will have been encouraged by this week’s results, which showed clear progress against the closest pre-pandemic comparator. “Unlike most of our peers, I suspect, we are actually ahead of where we were in 2019,” purred chief executive Greg Fitzgerald.

Adjusted revenue – which includes Vistry’s share of sales from its joint ventures – climbed to £1.26bn, 4 per cent up on the 2019 pro-forma figure. This happened despite a 7 per cent contraction in housebuilding completions, as the mix of affordable house sales declined from 35 to 27 per cent.

Making up the difference was a surge in activity from Vistry partnerships, where a big boost in mixed tenure completions drove revenues 16 per cent higher to £391m. With margins here rising, the decision to partner with local and housing authorities looks all but vindicated. Reduced capital strain has aided the swing to a net cash position and accelerated plans for a lower dividend cover ratio.

Fears that profitability could soon sink also look overdone: as at Persimmon (PSN), house price inflation has exceeded any drag from higher input costs. The adjusted housebuilding gross margin bounced back to 21.8 per cent, 20 basis points ahead of the 2019 figure and is now on track to hit 23 per cent next year.

Together with the eye-watering returns from the partnerships business – which currently generates returns on capital above 40 per cent – management seems confident that a medium-term target for a 25 per cent return is achievable.

Non-financial measures are improving, too. Insofar as a housebuilder’s brand matters in such a frenetic transactional period, Vistry can point to much better buyer feedback. Positive responses to the Home Builders Federation’s most recent customer satisfaction survey increased to 92.6 per cent; four years ago, the then-Bovis Homes was the only major developer with a score below 70 per cent.

FactSet-compiled consensus forecasts are for earnings of 122.2p per share this year, and 142.5p for 2022, which Numis analysts described as “cautious”. For its part, the brokerage has upgraded its estimates by 5 per cent for both years, to 126p and 146p, respectively.

Caution toward housebuilding stocks is not unwarranted, but the current valuation looks like an overly pessimistic assessment of the partnership-fuelled rise in the group-wide margin. Buy.

Last IC View: Buy, 943p, 3 Mar 2021

VISTRY (VTY)    
ORD PRICE:1,298pMARKET VALUE:£2.88bn
TOUCH:1,295-1,298p12-MONTH HIGH:1,351pLOW: 519p
DIVIDEND YIELD*:3.1%PE RATIO:14
NET ASSET VALUE:1,028pNET DEBT: 0.25%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20200.61-12.2-5.30.0
20211.1015654.820.0
% change+82---
Ex-div:07 Oct   
Payment:19 Nov   
*Includes intangible assets of £684m, or 308p a share.