Anymore thoughts in light of the trading update on the 15th?
An interesting revelation to me was that the 'unattractive commercial deals' that came to light in the last profit warning were in fact related to land sales to other homebuilders and not related to unattractive return profiles on partnership deals (as it seems most people assumed including myself). Basically GF not wanting to be taken advantage of by competitors.
Whilst this is of course positive - as it suggests no inherent issue with the partnership model where terms aren't attractive for both parties - it does raise the question; is Vistry recording land sales as part of their operating profit? Maybe this doesn't come as a surprise to most people (Im new to this industry) as land is inherently a part of the main product they sell (houses on land) but in some ways I'm surprised that the sell-off of their land bank isn't included as part of an exceptional item.
To illustrate the point I have a position in a newspaper business that is transitioning to a digital-only model and as such is liquidating their printing press facilities as they move away from the legacy print business. The cash from this is recorded on the cash flow statement under 'investment activity' and never appears on the income statement as it is not part of their operating profit. It would be strange to me for them to include this liquidation as income in the same way its strange that Vistry now appears to be wanting to include its land liquidation as profit on the income statement (hence the profit warning).
Does this mean for example the previous £800m EBIT guidance includes land sales?
Am I misunderstanding something and does anyone have any thoughts on this?
Thanks Louis. That's a great question, and the same thing that was going through my head when Greg said that.
My understanding is that, unless they're of unusual magnitude, it's standard practice for housebuilders to account for gains on sale of land within operating profit, rather than as exceptional items. This does actually make some sense - in the standard housebuilding model, as much of the value creation is in getting planning on a plot of land as is in the actual building of the homes. Hence, if you're selling off bits of land where you've worked it through the planning system and incurred all the costs that come with that, it does make sense to consider that as underlying profit. To use an analogy, it's like an auto manufacturer which sells 10% of its cars each year to another manufacturer when they're only halfway done - it should still record that profit as underlying. The land is inventory, not PPE.
However, Vistry is likely selling off more land than usual at the moment, because of the housebuilding wind-down. This does have the potential to distort things, if the value creation was done over several years and now you're recognising it all in one year. I've not been able to find any specific figures on this, unfortunately, so I don't know how much of their £250m profit this FY will have come from land sales.
But regarding their medium targets, by the time they are expecting to achieve those, they'll no longer be in the middle of a business transformation (hopefully - although who really knows with Greg). So while those targets may include some land sales, that will be more of an underlying thing like the auto manufacturer analogy.
To pick out one more point of interest from the call - at one point Greg says they may start offering discounts of more than 5% on some sites, to release the £100m in excess WIP as quick as possible. He says "you can all take away from this [what you will]". From what I've heard from major shareholders, Greg is a big buybacks guy, so I'm sure he's itching to repurchase some shares at these prices, but the board aren't so keen - so if you'll allow me to wildly speculate, I might take that as him hinting that the £100m released will go towards a special buyback (he also emphasised how much they're focusing on cash generation over growth this year, perhaps for the same reason - maybe the board have said "you can only do buybacks if we can get net debt below £x). Then again, it could well just be him pre-empting the analysts taking the >5% reductions as even more weakness in open market.
Great write up again! With analysts forecasting gilts (UK and US 10Y) to test 5% again in 2025, I think it'll create a bigger headwind for the sector. Inflation is also forecasted to remain elevated and that increases the risk of future cost overruns especially in the case of Vistry whose business model inherently lacks forward visibility.
I don't think it's enough to look at the cheapness of a stock as a definitive measure when deciding whether it's a buy or not. A sector's valuation can remain depressed as macro uncertainty persists, especially for a capital intensive sector like homebuilders.
Not that I have a huge deal of faith in analysts' forecasts - no one can predict the future, least of all economists.
Inflation is expected to sit between 2-2.5% for the next couple years, from what I've read. A fraction of a percent above target. Build cost inflation in particular was very severe in 2022, above 10% at some points, but has very much calmed down now (https://www.statista.com/statistics/1308264/construction-output-price-index-uk/). I don't think there's a good reason to believe it's gonna flare back to anywhere near that level in the foreseeable (though of course the economy is deeply unpredictable).
Interesting that you say Vistry's business model inherently lacks forward visibility - in my original write-up, I highlighted the model's better visibility as one of its key strengths. They pre-sell two thirds of their units and have a contractual period over which to deliver them - whereas speculative (normal) housebuilders have to try to match build rates to absorption rates, which are constantly changing as the macro changes. Forward-funded agreements also typically contain clauses where the partner takes on a lot of the commodity price risk - eg if Vistry has to pay more per brick than expected, the partner will reimburse them.
Regarding the second paragraph, my personal investing style is that fundamentals are all I think about - I don't try to predict the vagaries of Mr Market. If the stock returns to intrinsic value in 2026 instead of 2025, that's kind of okay with me. I'll leave the sentiment forecasting (in other words, trying to guess what other guessers guess the other guessers will guess - it's turtles all the way down) to the smart fellows at JP Morgan.
Great point. A large part of the reason NVR was able to return 1000x over 30 years was the low valuation of their shares - I believe they mostly traded below 10x earnings because the market did not understand their asset-light business model, and was used to valuing homebuilders on book.
Share repurchase seems to have paused for the time being after the third profit warning. Besides it was only £300,000 worth of repurchase per business day so pretty insignificant. I think it's foolish and naive to compare VTY with NVR for a variety of reasons not least because NVR was the beneficiary of a multi-decade low interest rate environment which we will no longer see.
EDIT: repurchases have continued as of 7 Jan - it seems they just reached the end of the first tranche.
Very disappointed to see the repurchases have ceased. Going to reserve any real judgement until Jan 15, see if they provide an explanation, but I'm not pleased about that - also annoyed with myself that I didn't check that beforehand.
Though others have, I don't mean to suggest Vistry and NVR are close parallels. I brought it up because I find the fact that NVR was able to compound at almost 30% while only growing units ~4% a year quite astonishing, and a persistently low valuation was a key factor in that. That explains why I am not worried about it taking a few years for Vistry's share price to turn around - the long-term result will be better the longer it takes, if they continue buybacks.
I think the more important fact about the last 30 years is not that interest rates were low, but that they were falling. They actually spent a fair chunk of it above where they are now.
Agree. Given that other UK housebuilders are actively returning profits to shareholders, it makes Vistry now less appealing to potential investors
And thanks for your clarification on NVR. I think many people are quick to jump the gun and compared VTY with NVR when VTY is very much just getting started with this capital light business model.
Hey Jacques - just to let you know repurchases have resumed, beginning 7th Jan. The initial agreement was for Numis Securities to carry out the first £43m of the £130m buyback programme, so I think the pause was just that tranche coming to an end.
Thanks for this Matt; I admire your frankness about past mistakes. We need more of that. I also agree that Vistry remains a compelling value proposition.
awesome saturday morning read. i'm with you here, after the first and second profit warning. i'm full here so just chilling and waiting.
i think most of the returns will have to come in the 2nd half of the 5 year plan that labour party has for uk, so delayed gratification out to 2028-2030.
I gave this a like because I admire your acknowledgement of the significant drop in the stock price of your pick, and willingness to address it. On the other hand, even though I was a real estate broker and appraiser for many years, I don't know anything about the UK market, and even less about your laws and regulations, I still am amazed at your doubling down on a capital intensive industry after such a loss. It could be a value trap. So-called high interest rates are a drag on any capital intensive business or industry, and 4.5% isn't even high when you look at the history of interest rates - so I expect they'll stay 'high'. From what I've heard of UK government policies, I'd be hesitant to invest in any UK industry. Hoping for more subsidies isn't an attractive way to invest.
Cheers Al. I think if you read the original post, it should address some of the concerns you raise - particularly as it pertains to the capital intensity of Vistry.
Thanks for the update Matt. A central thesis is that the combination of Vistry's strong track record/relationships + local authorities' risk averse political incentives = high 40% ROCEs that are durable and difficult for peers to compete away.
I was wondering how many peers you've looked at that also do regeneration projects to see what industry avg ROCEs and operating margins are? Notably, Kier Group (KIE) has a much smaller "Property" segment that also does urban regeneration projects but their targeted ROCEs are much lower at 15% (see KIE's 2022 investor deck).
From Vistry's latest profit warning, we know Vistry has walked away from a few proposals due to subpar ROCEs... if we consider that there are competent competitors out there like Kier who will build track records over time, in addition to tightening HA budgets due to interest coverage limits, perhaps Vistry will have no choice but to accept lower ROCEs going forward?
We know that Countryside pre-merger was regularly doing +70% ROCEs. Let's assume these excess returns are durable and that they will do £1B of rev in the medium-term. If we assume Vistry in total will do £5B of revenue in the medium term, with the non-Countryside revenues at a similar 15% ROCE to KIE's, then it would imply roughly ~26% ROCEs versus Mgmt's 40% guide; math = (1*0.7 + 4*0.15)/5.
If we take Mgmt's implied medium term capital employed amount of ~£2B (£800M EBITA at 40% ROCE), that implies about £520M of adj. EBITA. By my math that implies roughly £300M of net income, or £0.90/sh of medium-term EPS. Let's assume a 10x multiple for a £9.00 stock in the medium term. It'll still pencil out to a low-teens IRR, which isn't amazing, but I suppose it's acceptable for a bear case. Curious what you think of this kind of scenario, and looking forward to reading your response.
I've looked at a couple - I hadn't looked at Kier (so thank you for bringing that one to my attention) but Lovell and Keepmoat are both substantially larger operations (Kier's FY24 revenue in the Property segment, which contains regenerations alongside a couple other things, was only about £70m).
Size matters in the housebuilding business. Notice that Vistry, with ~16k units, are targeting 40% ROCE; Lovell (~3000 units) are targeting 25%, and Kier, with a few hundred units, are targeting 15%.
All partnerships developers are undershooting those ROCE targets pretty significantly. Vistry's will probably be below 20% in 2024, though in fairness a fair few non-partnerships schemes that remain on their balance sheet are bumping the denominator up a fair bit. Lovell has achieved ~11% TTM, and Kier Property was virtually breakeven in FY24 after you remove a one-time gain on investments (and that's before corporate overheads, which are reported as a separate segment - as a standalone business, Kier Property would be loss-making).
I would also challenge your suggestion that HAs tightening their belts will disadvantage Vistry. First, recall that alongside the 40% ROCE, Vistry is targeting a margin of only 12%. Hence, the difference between 40% and 15% ROCE under those conditions is only 7.5%. The vast majority of that is accounted for by Vistry's lower cost base, rather than higher price tag. So if Kier is offering any price advantage at all, it will be no more than 2% or 3%. Second, what HAs need more than a couple percent lower price tags at the moment is reliability. Some of them may be walking on a bit of a knife edge, but they are on the right side of the knife edge - they can afford their debt, as long as nothing goes drastically wrong. So I would argue this makes them risk-sensitive more than cost-sensitive (though of course it is both).
On the other hand, I'm fairly certain the Countryside business won't be doing 70% ROCEs right now, nor do I think it will get back there. The 2016-2019 period was a bit of a golden era for housebuilders (just look at their share prices), with multiple factors - a stable economy, low rates, the help to buy scheme, advancing land & home prices - all on their side. Most developers were doing >20% operating margins, some >30%. ROCEs across the industry pushing 30%, sometimes higher. Being a mostly moatless industry, that isn't sustainable. Hence the CMA investigation, really. Countryside also had fantastically low capital employed. I would also note that your maths is wrong - to get the overall ROCE, you need to weight the two businesses by their capital employed, not their revenue. To explain why this matters, imagine you have two businesses - one earns £10k on £1m of capital employed (1%) the other earns £10k on £10k of capital employed (100%), but both at the same margin. Your overall ROCE is not ~50%, as your maths would imply - it's ~2% (£20k/£1.01m).
More importantly, I don't think capital employed is the right direction to come at this from in terms of forecasting earnings. If conditions required them to hold £3b of CE instead of £2b in order to earn £800m operating profit, I'm fairly sure they would do so. ROCE isn't really the limiting factor, at least above maybe a 25% ROCE. Beyond that point, it's just a matter of how much the affordable housing market grows, and what kind of margins are available. Their assumption of £800m EBIT at a 12% margin implies £6.7b of revenue, which probably means 24,000 units. Is that possible in the medium term, say before 2030? That's very dependent on how seriously the government decides to take the affordable housing crisis.
However, I do think you make a good point. Competitors exist, and they're willing to accept a lower ROCE than Vistry. If they scale up significantly, the cost differential will fall, and Vistry might have to lower their target ROCE. To assess how likely this is, I'm continuing to reach out to people in the industry - at Vistry, competitors, HAs and LAs. If I come to any surprising conclusions I will post another update.
I always appreciate people challenging my ideas so thank you for your thoughtful critique.
Thank you for your thoughts, especially on the Housing Associations' financials. Is there any disclosure of those ?
The transaction and completion delay sounds to me more like delay of delivery, rather than construction. The CEO mentioned several times at analyst communications, the bottleneck of growth is production capacity, not demand. Although some Housing Associations are in bad financial position, Vistry still sees sufficient demand from those in better positions. It would be especially useful to know whether this still holds.
My guess is the Housing Association(s), that suppose to take delivery by the end of the year, find itself in danger of breaching certain loan financial covenants, hence asked for a delay of delivery. The covenant checks are usually based on the financials at the end of fiscal year or quarter. This also explained why the announcement was close to the year end.
If those houses are already completed, then Vistry would not need to incur additional labor costs on them.
Of course, this might be just my wishful thinking. Hopefully, Vistry will explain the reason of completion delay.
It also reminds me one risk that is unique to Vistry: concentration risk. Unlike open market business, where the customers are individual buyers, Vistry's income is much more concentrated. Financial problems with its clients would have much bigger impact on its performance. Its receivables and borrowing as of June 2024 were large due to the same reason.
P.S.
There should be about £25¬30m interest income, so the net interest expenses is likely to be about £60¬65m.
I've realised there's a good bit more financial disclosure about the HAs in aggregate than I thought. The main source is the Sector Risk Profiles from the Regulator of Social Housing - see the most recent one here: https://www.gov.uk/government/publications/sector-risk-profile-2024
Completion delay is a delay of delivery. Transaction delay is not - that's Vistry choosing not to take on projects because the terms offered aren't attractive enough. Low prices, ie low demand. I don't think it's fair to say either demand or capacity are THE bottleneck - economics 101 is that volume and price are both functions of both supply and demand. Sure, supply isn't instantaneously flexible - if there is a sudden increase in demand, volume sometimes cannot be immediately increased no matter what price the customer/partner is offering - but I think it's pretty clear that's not Vistry's current situation.
Yes, there are a lot of healthy HAs, however that's not a saving grace - reduced demand, while capacity remains steady, very simply means prices will come down. There is increased competition between developers for a smaller amount of business, so they bid each other down more to barely above, or maybe below, the cost of capital.
I think that if the cause of the completion delays was simply the HAs being at risk of breaching covenants, (a) Vistry probably would have said so, as it shifts the blame away from their own execution, (b) it wouldn't really affect the income statement, as revenue/profit is recorded as costs are incurred - this would still be happening, the only difference would be cash not actually changing hands and Vistry effectively extends the customer a line of credit.
I'm not particularly worried about concentration risk, actually. Affordable housing is a pretty fragmented market so it's not like half of their developments are with a single provider or anything. They do have some projects which alone are pretty big, and the affordable partner on that going bust would have an impact. However, no HA has ever defaulted on its debt (there have been a few insolvencies, but these have been solved via merger into a larger HA); creditors tend to be pretty flexible with waiving covenants etc; the Regulator actively monitors the health of HAs, particularly the big ones, and has not flagged any cause for immediate concern; and in the worst case, a partner on a huge project goes bust and cannot be saved, the units could probably be sold to another HA without a huge haircut.
CFO's comment at H1'24 was "net interest in H1 was about £41m; H2 will probably be about the same" - the £85m figure I used was net of interest income already. I bumped that up by £15m to account for higher net debt.
Hey Matt - I like your writing and thinking and will have another deep dive into Vistry soon too.
I dont know your capital size, what its share compared to your saving rate, other income, etc. But I think taking a 50% position in a market/business you don't fully understand is very ambitious. They are changing there operating model, which is a risk in itself - mistakes are more likely. Furthermore, though management has been discussed - I at least - couldn't form a clear opinion on Fitz - is he really a humbled person that can generate ROE greater 40% long-term and has a string shareholder orientation in mind?
I probably should have clarified again in this post - in fact I'll edit it now - the portfolio here is a virtual one for tracking performance. My personal portfolio has a somewhat smaller allocation - maybe 25% if we include cash in the total - and additionally I expect future saved income will be large in relation to the portfolio's current size, so it makes more sense to take larger positions where I think the risk reward is in my favour.
While I'm not encyclopedic on the housebuilding industry as it stands, I've put in a lot of hours of work already and I do think I have a pretty decent understanding. Regardless, I appreciate you calling me out on my shit.
The ambivalent view of Greg that you've gotten from my writing does reflect my own uncertainty. He's done a generally good job at creating shareholder value in the past, in excess of the industry as a whole. He's a down-to-earth guy, who at least in my eye seems to give a shit about people. I like how he is compensated, and I like the way he thinks about the business. At the same time, there are some not-insignificant related party transactions; weird things like buying shares via Baker Estates rather than personally; 3 profit warnings in a month; pausing the buyback scheme (it would seem - unless it's just a holiday thing); and buying Galliford and Countryside with shares rather than debt. My opinion of him is souring over time - we will see if he can turn that around. This ambivalence is also evident inside the company, apparently - employees have reported that half the company thinks he's god's gift to man and the other half don't like/trust him. I'm going to invest a good bit more time into trying to develop my understanding of him.
End of the day, I think right now the shares are cheap enough that it's just a very worthwhile bet. They're below book, and only 8 times the average of the last 4 years' earnings, and there isn't material risk of financial trouble.
Well, it depends on the nature of the information and the purpose behind sharing it. In this case, it seems like the data was probably just being shared to avoid the risk of a developer overpaying for land - I highly doubt there was any attempt at collusion, as explained. To be honest, I'm not too sure how the sharing of this sort of data would reduce the competitiveness of a market, in the absence of collusion - other than slightly disadvantaging the uninvolved parties. My guess for the consequences (aside from those described in the post) would be a nominal fine, between several hundred £k and several £m, for any developers found to be involved - a slap on the wrist, essentially, though with the threat of a much larger fine if it continues. But I'm not an expert on this stuff either so take with a pinch of salt.
The Very Good Value Portfolio is only a virtual portfolio, intended to track my picks' performance and allow readers to easily check if I'm worth my salt (though of course it takes a few years for that to become clear). My real portfolio bears a lot of similarity to it, but contains several positions from before I started writing, as well as one or two which I haven't finished researching (my philosophy is to only add something to the public portfolio after I've written it up). So there are no 50% positions. At the same time, I do intend to be very aggressive in my personal investing, and I'm willing to swing for the fences when I think the risk/reward picture is attractive enough. I wouldn't invest other people's money the way I do mine.
Great stuff Matt, thank you.
Anymore thoughts in light of the trading update on the 15th?
An interesting revelation to me was that the 'unattractive commercial deals' that came to light in the last profit warning were in fact related to land sales to other homebuilders and not related to unattractive return profiles on partnership deals (as it seems most people assumed including myself). Basically GF not wanting to be taken advantage of by competitors.
Whilst this is of course positive - as it suggests no inherent issue with the partnership model where terms aren't attractive for both parties - it does raise the question; is Vistry recording land sales as part of their operating profit? Maybe this doesn't come as a surprise to most people (Im new to this industry) as land is inherently a part of the main product they sell (houses on land) but in some ways I'm surprised that the sell-off of their land bank isn't included as part of an exceptional item.
To illustrate the point I have a position in a newspaper business that is transitioning to a digital-only model and as such is liquidating their printing press facilities as they move away from the legacy print business. The cash from this is recorded on the cash flow statement under 'investment activity' and never appears on the income statement as it is not part of their operating profit. It would be strange to me for them to include this liquidation as income in the same way its strange that Vistry now appears to be wanting to include its land liquidation as profit on the income statement (hence the profit warning).
Does this mean for example the previous £800m EBIT guidance includes land sales?
Am I misunderstanding something and does anyone have any thoughts on this?
Thanks Louis. That's a great question, and the same thing that was going through my head when Greg said that.
My understanding is that, unless they're of unusual magnitude, it's standard practice for housebuilders to account for gains on sale of land within operating profit, rather than as exceptional items. This does actually make some sense - in the standard housebuilding model, as much of the value creation is in getting planning on a plot of land as is in the actual building of the homes. Hence, if you're selling off bits of land where you've worked it through the planning system and incurred all the costs that come with that, it does make sense to consider that as underlying profit. To use an analogy, it's like an auto manufacturer which sells 10% of its cars each year to another manufacturer when they're only halfway done - it should still record that profit as underlying. The land is inventory, not PPE.
However, Vistry is likely selling off more land than usual at the moment, because of the housebuilding wind-down. This does have the potential to distort things, if the value creation was done over several years and now you're recognising it all in one year. I've not been able to find any specific figures on this, unfortunately, so I don't know how much of their £250m profit this FY will have come from land sales.
But regarding their medium targets, by the time they are expecting to achieve those, they'll no longer be in the middle of a business transformation (hopefully - although who really knows with Greg). So while those targets may include some land sales, that will be more of an underlying thing like the auto manufacturer analogy.
To pick out one more point of interest from the call - at one point Greg says they may start offering discounts of more than 5% on some sites, to release the £100m in excess WIP as quick as possible. He says "you can all take away from this [what you will]". From what I've heard from major shareholders, Greg is a big buybacks guy, so I'm sure he's itching to repurchase some shares at these prices, but the board aren't so keen - so if you'll allow me to wildly speculate, I might take that as him hinting that the £100m released will go towards a special buyback (he also emphasised how much they're focusing on cash generation over growth this year, perhaps for the same reason - maybe the board have said "you can only do buybacks if we can get net debt below £x). Then again, it could well just be him pre-empting the analysts taking the >5% reductions as even more weakness in open market.
Really appreciate your thoughts, thank you
The book value point has been missed or gone under the radar in other recent analyses. You have made a good observation and point here
Great write up again! With analysts forecasting gilts (UK and US 10Y) to test 5% again in 2025, I think it'll create a bigger headwind for the sector. Inflation is also forecasted to remain elevated and that increases the risk of future cost overruns especially in the case of Vistry whose business model inherently lacks forward visibility.
I don't think it's enough to look at the cheapness of a stock as a definitive measure when deciding whether it's a buy or not. A sector's valuation can remain depressed as macro uncertainty persists, especially for a capital intensive sector like homebuilders.
I've not been able to find anything suggesting the 10Y gilt is expected to test 5% - all the sources I can find seem to be of the opinion that it will drift down towards 4% through 2025. https://cbonds.com/indexes/?tree_search_type=subgroup&tree_search_id=5413 https://think.ing.com/articles/rates-three-reasons-10y-gilt-yields-should-revert-below-usts-eventually/ https://www.capitaleconomics.com/publications/bonds-update/will-gilts-shrug-weeks-budget
Not that I have a huge deal of faith in analysts' forecasts - no one can predict the future, least of all economists.
Inflation is expected to sit between 2-2.5% for the next couple years, from what I've read. A fraction of a percent above target. Build cost inflation in particular was very severe in 2022, above 10% at some points, but has very much calmed down now (https://www.statista.com/statistics/1308264/construction-output-price-index-uk/). I don't think there's a good reason to believe it's gonna flare back to anywhere near that level in the foreseeable (though of course the economy is deeply unpredictable).
Interesting that you say Vistry's business model inherently lacks forward visibility - in my original write-up, I highlighted the model's better visibility as one of its key strengths. They pre-sell two thirds of their units and have a contractual period over which to deliver them - whereas speculative (normal) housebuilders have to try to match build rates to absorption rates, which are constantly changing as the macro changes. Forward-funded agreements also typically contain clauses where the partner takes on a lot of the commodity price risk - eg if Vistry has to pay more per brick than expected, the partner will reimburse them.
Regarding the second paragraph, my personal investing style is that fundamentals are all I think about - I don't try to predict the vagaries of Mr Market. If the stock returns to intrinsic value in 2026 instead of 2025, that's kind of okay with me. I'll leave the sentiment forecasting (in other words, trying to guess what other guessers guess the other guessers will guess - it's turtles all the way down) to the smart fellows at JP Morgan.
A persistently low valuation is exactly what one would hope for. This is because share repurchases are that more powerful.
Great point. A large part of the reason NVR was able to return 1000x over 30 years was the low valuation of their shares - I believe they mostly traded below 10x earnings because the market did not understand their asset-light business model, and was used to valuing homebuilders on book.
Share repurchase seems to have paused for the time being after the third profit warning. Besides it was only £300,000 worth of repurchase per business day so pretty insignificant. I think it's foolish and naive to compare VTY with NVR for a variety of reasons not least because NVR was the beneficiary of a multi-decade low interest rate environment which we will no longer see.
EDIT: repurchases have continued as of 7 Jan - it seems they just reached the end of the first tranche.
Very disappointed to see the repurchases have ceased. Going to reserve any real judgement until Jan 15, see if they provide an explanation, but I'm not pleased about that - also annoyed with myself that I didn't check that beforehand.
Though others have, I don't mean to suggest Vistry and NVR are close parallels. I brought it up because I find the fact that NVR was able to compound at almost 30% while only growing units ~4% a year quite astonishing, and a persistently low valuation was a key factor in that. That explains why I am not worried about it taking a few years for Vistry's share price to turn around - the long-term result will be better the longer it takes, if they continue buybacks.
I think the more important fact about the last 30 years is not that interest rates were low, but that they were falling. They actually spent a fair chunk of it above where they are now.
Agree. Given that other UK housebuilders are actively returning profits to shareholders, it makes Vistry now less appealing to potential investors
And thanks for your clarification on NVR. I think many people are quick to jump the gun and compared VTY with NVR when VTY is very much just getting started with this capital light business model.
Hey Jacques - just to let you know repurchases have resumed, beginning 7th Jan. The initial agreement was for Numis Securities to carry out the first £43m of the £130m buyback programme, so I think the pause was just that tranche coming to an end.
https://www.londonstockexchange.com/news-article/VTY/share-buyback-management-of-the-programme/16831487
Sounds like we will get an update on the plans for the programme at the full year results on the 15th.
Great write-up, much better value than those substack instilling FOMO trying to make subscription money! Good luck with your journey!
Thanks!!
Thanks for this Matt; I admire your frankness about past mistakes. We need more of that. I also agree that Vistry remains a compelling value proposition.
Great analysis, a bit too risky and unpredictable for me though. Keep up the good work!
Great analysis, a bit too risky and unpredictable for me though. Too many moving parts maybe?Keep up the good work!
awesome saturday morning read. i'm with you here, after the first and second profit warning. i'm full here so just chilling and waiting.
i think most of the returns will have to come in the 2nd half of the 5 year plan that labour party has for uk, so delayed gratification out to 2028-2030.
I gave this a like because I admire your acknowledgement of the significant drop in the stock price of your pick, and willingness to address it. On the other hand, even though I was a real estate broker and appraiser for many years, I don't know anything about the UK market, and even less about your laws and regulations, I still am amazed at your doubling down on a capital intensive industry after such a loss. It could be a value trap. So-called high interest rates are a drag on any capital intensive business or industry, and 4.5% isn't even high when you look at the history of interest rates - so I expect they'll stay 'high'. From what I've heard of UK government policies, I'd be hesitant to invest in any UK industry. Hoping for more subsidies isn't an attractive way to invest.
Cheers Al. I think if you read the original post, it should address some of the concerns you raise - particularly as it pertains to the capital intensity of Vistry.
Thanks for the update Matt. A central thesis is that the combination of Vistry's strong track record/relationships + local authorities' risk averse political incentives = high 40% ROCEs that are durable and difficult for peers to compete away.
I was wondering how many peers you've looked at that also do regeneration projects to see what industry avg ROCEs and operating margins are? Notably, Kier Group (KIE) has a much smaller "Property" segment that also does urban regeneration projects but their targeted ROCEs are much lower at 15% (see KIE's 2022 investor deck).
From Vistry's latest profit warning, we know Vistry has walked away from a few proposals due to subpar ROCEs... if we consider that there are competent competitors out there like Kier who will build track records over time, in addition to tightening HA budgets due to interest coverage limits, perhaps Vistry will have no choice but to accept lower ROCEs going forward?
We know that Countryside pre-merger was regularly doing +70% ROCEs. Let's assume these excess returns are durable and that they will do £1B of rev in the medium-term. If we assume Vistry in total will do £5B of revenue in the medium term, with the non-Countryside revenues at a similar 15% ROCE to KIE's, then it would imply roughly ~26% ROCEs versus Mgmt's 40% guide; math = (1*0.7 + 4*0.15)/5.
If we take Mgmt's implied medium term capital employed amount of ~£2B (£800M EBITA at 40% ROCE), that implies about £520M of adj. EBITA. By my math that implies roughly £300M of net income, or £0.90/sh of medium-term EPS. Let's assume a 10x multiple for a £9.00 stock in the medium term. It'll still pencil out to a low-teens IRR, which isn't amazing, but I suppose it's acceptable for a bear case. Curious what you think of this kind of scenario, and looking forward to reading your response.
I've looked at a couple - I hadn't looked at Kier (so thank you for bringing that one to my attention) but Lovell and Keepmoat are both substantially larger operations (Kier's FY24 revenue in the Property segment, which contains regenerations alongside a couple other things, was only about £70m).
Size matters in the housebuilding business. Notice that Vistry, with ~16k units, are targeting 40% ROCE; Lovell (~3000 units) are targeting 25%, and Kier, with a few hundred units, are targeting 15%.
All partnerships developers are undershooting those ROCE targets pretty significantly. Vistry's will probably be below 20% in 2024, though in fairness a fair few non-partnerships schemes that remain on their balance sheet are bumping the denominator up a fair bit. Lovell has achieved ~11% TTM, and Kier Property was virtually breakeven in FY24 after you remove a one-time gain on investments (and that's before corporate overheads, which are reported as a separate segment - as a standalone business, Kier Property would be loss-making).
I would also challenge your suggestion that HAs tightening their belts will disadvantage Vistry. First, recall that alongside the 40% ROCE, Vistry is targeting a margin of only 12%. Hence, the difference between 40% and 15% ROCE under those conditions is only 7.5%. The vast majority of that is accounted for by Vistry's lower cost base, rather than higher price tag. So if Kier is offering any price advantage at all, it will be no more than 2% or 3%. Second, what HAs need more than a couple percent lower price tags at the moment is reliability. Some of them may be walking on a bit of a knife edge, but they are on the right side of the knife edge - they can afford their debt, as long as nothing goes drastically wrong. So I would argue this makes them risk-sensitive more than cost-sensitive (though of course it is both).
On the other hand, I'm fairly certain the Countryside business won't be doing 70% ROCEs right now, nor do I think it will get back there. The 2016-2019 period was a bit of a golden era for housebuilders (just look at their share prices), with multiple factors - a stable economy, low rates, the help to buy scheme, advancing land & home prices - all on their side. Most developers were doing >20% operating margins, some >30%. ROCEs across the industry pushing 30%, sometimes higher. Being a mostly moatless industry, that isn't sustainable. Hence the CMA investigation, really. Countryside also had fantastically low capital employed. I would also note that your maths is wrong - to get the overall ROCE, you need to weight the two businesses by their capital employed, not their revenue. To explain why this matters, imagine you have two businesses - one earns £10k on £1m of capital employed (1%) the other earns £10k on £10k of capital employed (100%), but both at the same margin. Your overall ROCE is not ~50%, as your maths would imply - it's ~2% (£20k/£1.01m).
More importantly, I don't think capital employed is the right direction to come at this from in terms of forecasting earnings. If conditions required them to hold £3b of CE instead of £2b in order to earn £800m operating profit, I'm fairly sure they would do so. ROCE isn't really the limiting factor, at least above maybe a 25% ROCE. Beyond that point, it's just a matter of how much the affordable housing market grows, and what kind of margins are available. Their assumption of £800m EBIT at a 12% margin implies £6.7b of revenue, which probably means 24,000 units. Is that possible in the medium term, say before 2030? That's very dependent on how seriously the government decides to take the affordable housing crisis.
However, I do think you make a good point. Competitors exist, and they're willing to accept a lower ROCE than Vistry. If they scale up significantly, the cost differential will fall, and Vistry might have to lower their target ROCE. To assess how likely this is, I'm continuing to reach out to people in the industry - at Vistry, competitors, HAs and LAs. If I come to any surprising conclusions I will post another update.
I always appreciate people challenging my ideas so thank you for your thoughtful critique.
Thanks Matt! My math was really off the mark wasn't it, ha! Looking forward to any future updates you have
Thank you for your thoughts, especially on the Housing Associations' financials. Is there any disclosure of those ?
The transaction and completion delay sounds to me more like delay of delivery, rather than construction. The CEO mentioned several times at analyst communications, the bottleneck of growth is production capacity, not demand. Although some Housing Associations are in bad financial position, Vistry still sees sufficient demand from those in better positions. It would be especially useful to know whether this still holds.
My guess is the Housing Association(s), that suppose to take delivery by the end of the year, find itself in danger of breaching certain loan financial covenants, hence asked for a delay of delivery. The covenant checks are usually based on the financials at the end of fiscal year or quarter. This also explained why the announcement was close to the year end.
If those houses are already completed, then Vistry would not need to incur additional labor costs on them.
Of course, this might be just my wishful thinking. Hopefully, Vistry will explain the reason of completion delay.
It also reminds me one risk that is unique to Vistry: concentration risk. Unlike open market business, where the customers are individual buyers, Vistry's income is much more concentrated. Financial problems with its clients would have much bigger impact on its performance. Its receivables and borrowing as of June 2024 were large due to the same reason.
P.S.
There should be about £25¬30m interest income, so the net interest expenses is likely to be about £60¬65m.
I've realised there's a good bit more financial disclosure about the HAs in aggregate than I thought. The main source is the Sector Risk Profiles from the Regulator of Social Housing - see the most recent one here: https://www.gov.uk/government/publications/sector-risk-profile-2024
Completion delay is a delay of delivery. Transaction delay is not - that's Vistry choosing not to take on projects because the terms offered aren't attractive enough. Low prices, ie low demand. I don't think it's fair to say either demand or capacity are THE bottleneck - economics 101 is that volume and price are both functions of both supply and demand. Sure, supply isn't instantaneously flexible - if there is a sudden increase in demand, volume sometimes cannot be immediately increased no matter what price the customer/partner is offering - but I think it's pretty clear that's not Vistry's current situation.
Yes, there are a lot of healthy HAs, however that's not a saving grace - reduced demand, while capacity remains steady, very simply means prices will come down. There is increased competition between developers for a smaller amount of business, so they bid each other down more to barely above, or maybe below, the cost of capital.
I think that if the cause of the completion delays was simply the HAs being at risk of breaching covenants, (a) Vistry probably would have said so, as it shifts the blame away from their own execution, (b) it wouldn't really affect the income statement, as revenue/profit is recorded as costs are incurred - this would still be happening, the only difference would be cash not actually changing hands and Vistry effectively extends the customer a line of credit.
I'm not particularly worried about concentration risk, actually. Affordable housing is a pretty fragmented market so it's not like half of their developments are with a single provider or anything. They do have some projects which alone are pretty big, and the affordable partner on that going bust would have an impact. However, no HA has ever defaulted on its debt (there have been a few insolvencies, but these have been solved via merger into a larger HA); creditors tend to be pretty flexible with waiving covenants etc; the Regulator actively monitors the health of HAs, particularly the big ones, and has not flagged any cause for immediate concern; and in the worst case, a partner on a huge project goes bust and cannot be saved, the units could probably be sold to another HA without a huge haircut.
CFO's comment at H1'24 was "net interest in H1 was about £41m; H2 will probably be about the same" - the £85m figure I used was net of interest income already. I bumped that up by £15m to account for higher net debt.
Hey Matt - I like your writing and thinking and will have another deep dive into Vistry soon too.
I dont know your capital size, what its share compared to your saving rate, other income, etc. But I think taking a 50% position in a market/business you don't fully understand is very ambitious. They are changing there operating model, which is a risk in itself - mistakes are more likely. Furthermore, though management has been discussed - I at least - couldn't form a clear opinion on Fitz - is he really a humbled person that can generate ROE greater 40% long-term and has a string shareholder orientation in mind?
I probably should have clarified again in this post - in fact I'll edit it now - the portfolio here is a virtual one for tracking performance. My personal portfolio has a somewhat smaller allocation - maybe 25% if we include cash in the total - and additionally I expect future saved income will be large in relation to the portfolio's current size, so it makes more sense to take larger positions where I think the risk reward is in my favour.
While I'm not encyclopedic on the housebuilding industry as it stands, I've put in a lot of hours of work already and I do think I have a pretty decent understanding. Regardless, I appreciate you calling me out on my shit.
The ambivalent view of Greg that you've gotten from my writing does reflect my own uncertainty. He's done a generally good job at creating shareholder value in the past, in excess of the industry as a whole. He's a down-to-earth guy, who at least in my eye seems to give a shit about people. I like how he is compensated, and I like the way he thinks about the business. At the same time, there are some not-insignificant related party transactions; weird things like buying shares via Baker Estates rather than personally; 3 profit warnings in a month; pausing the buyback scheme (it would seem - unless it's just a holiday thing); and buying Galliford and Countryside with shares rather than debt. My opinion of him is souring over time - we will see if he can turn that around. This ambivalence is also evident inside the company, apparently - employees have reported that half the company thinks he's god's gift to man and the other half don't like/trust him. I'm going to invest a good bit more time into trying to develop my understanding of him.
End of the day, I think right now the shares are cheap enough that it's just a very worthwhile bet. They're below book, and only 8 times the average of the last 4 years' earnings, and there isn't material risk of financial trouble.
Thanks for the update. Still watching from the sidelines. Have been looking at competitors as well. Interesting to see what you find.
Not an expert on UK competition laws but sharing non public information is quite a big deal in most developed countries.
What do you think the consequences will be?
Not sure how large your portfolio is in relation to income/other investments but allocating 50% to a stock after it surprised you is quite aggressive.
Well, it depends on the nature of the information and the purpose behind sharing it. In this case, it seems like the data was probably just being shared to avoid the risk of a developer overpaying for land - I highly doubt there was any attempt at collusion, as explained. To be honest, I'm not too sure how the sharing of this sort of data would reduce the competitiveness of a market, in the absence of collusion - other than slightly disadvantaging the uninvolved parties. My guess for the consequences (aside from those described in the post) would be a nominal fine, between several hundred £k and several £m, for any developers found to be involved - a slap on the wrist, essentially, though with the threat of a much larger fine if it continues. But I'm not an expert on this stuff either so take with a pinch of salt.
The Very Good Value Portfolio is only a virtual portfolio, intended to track my picks' performance and allow readers to easily check if I'm worth my salt (though of course it takes a few years for that to become clear). My real portfolio bears a lot of similarity to it, but contains several positions from before I started writing, as well as one or two which I haven't finished researching (my philosophy is to only add something to the public portfolio after I've written it up). So there are no 50% positions. At the same time, I do intend to be very aggressive in my personal investing, and I'm willing to swing for the fences when I think the risk/reward picture is attractive enough. I wouldn't invest other people's money the way I do mine.
Ok, just be careful. 50% looks rather reckless to me.