Temporary cost problems, misinterpreted by the market as a fundamental issue, have left this high-quality growth company at less than 8x underlying earnings.
nice write up. My concern is in trusting management as they said they had a one off profit warning and then announced another one a couple weeks later. Also the COO just stepped down. If Vistry can actually do what management thinks it can than the stock is incredibly cheap but I currently have little to no faith in management.
Thanks, I do like the protection that PRS offers. I am not as confident as everyone else seems to be that interest rates have dropped and will just stay low now, but also wouldn't assign much confidence to predicting interest rates going forward
Hi, very good and insightful article. I don’t like $VTY.L because I think management targets are dishonest. After the recent drops, valuation is getting more reasonable. My questions are: given that market share among homebuilders is fairly stable at the top and the UK construction market is not much of a growth industry, do you think the valuation is that compelling? Isn’t the ROCE of 40% very exaggerated on a normalized basis? What do you think of management's talk of doubling output for an already large company? Isn’t the fact that they don’t own much land a bad thing for investors, since you have less margin of safety in terms of tangible assets to rely on? I own Crest Nicholson, which is the shittiest big construction company, but also the cheapest.
As explained, I think the affordable and PRS markets are set to become growth industries under Labour. Doubling output doesn't seem likely, but I think there is room for substantial growth over time (5-10% PA) if the funding is there for affordable development. If affordable and PRS expands compared to private, Vistry's market share will grow.
I'm not sure exactly what you mean by ROCE being exaggerated on a normalised basis - could you elaborate? Is this also what you mean when you say management targets are dishonest?
I don't think the fact they don't own land is a bad thing. NVR, the US housebuilder, pioneered the use of options to control land instead of buying it outright, and the stock is now up 1000x since 1996 (that's not a typo). Smaller land bank means higher ROCE, which means you can expand faster while returning more capital to shareholders. Sure, you don't have the hard-asset downside protection, but I'd rather have a PE of 10 at 2x book (20% ROE) than a PE of 10 at 1x book (10% ROE). Cash flows offer the downside protection, you don't always need hard assets.
I just thought I’d chime in and echo the appreciation of your analysis. Something I wish I had the time to research but with young kids every second is precious.
I popped this on my watchlist after the first profit warning and was reluctant to buy in due to the inevitably of a second PW. With the second warning out I feel the risk reward has started to become more appealing. South division aside, I particularly like the additional £8m cost issue disclosures, the reduction in completions and the downward revisions of PBT. Those items make me feel that the new forecasts are achievable -perhaps beatable if I’m being incredibly optimistic.
I completely agree that there seems to be a lot of criticism of the partnerships model however it doesn’t seem to be the cause of this issue, more likely poor estimating, cost reporting, mismanagement and perhaps a smidge of legacy brushing under the carpet. The criticism centres on inflationary pressures including the ENI contributions which seem relatively muted inputs from high level analysis I’ve conducted. I’m not sure if these commentators give enough weight to the fact that we’ve recently come through a period of unprecedented inflation and legislative change in the removal of rebated diesel use on construction sites. Short of another energy crisis it is likely that inflationary inputs will pale in comparison over the next few years. Simply stated any company that has come through the last few years with limited debt/ fundraising has demonstrated a resilience that makes me very comfortable. In addition it is front and centre of construction managers decision making and certainly more prevalent than it was pre 2020.
On a cautious note: one thing I’ll be keeping a close eye on is monthly and daily net debt as it would be reasonable to assume that as the partnerships model up front cash starts to come through the numbers that this figure will reduce -perhaps even dramatically.
These reasons, asset backing, shareholder returns along with many of the additional reasons for optimism (better researched and explained by you) are why I have taken a position and kept buying through the recent lows, I also like the idea that house builders should be relatively shielded from Trumps antics across the pond.
Labour have promised to catalyse house building and while it is apparent that it won’t trend close to their pre-election grandiosity, Vistry will most likely be swimming with the current all they now need to do is execute and under promise then over deliver for the next few reporting updates.
Thanks for the thorough overview. How do you think increasing interest rates could affect the business? This would put a dampener on private sales and typically bearish for house builders, but would the partnership model protect against this? Local authorities would be under even more pressure to provide affordable housing
If you're worrying about increasing interest rates I think you're about 2 years too late.
More generally - interest rates will go up and they'll go down, recessions will come and go, and people will continue needing housing. Particularly affordable housing. I'm not worried - this is a long term hold and they should do well through the cycle.
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To answer your question though - rising rates affected 2023 numbers, but completions only fell 5% - and that was at the same time as a cost of living crisis and the end of Help To Buy. And that was, in total, a 515bps rise. I think it's unlikely we see much worse than that on the interest rate side, so I wouldn't stress. The other possibility is a major recession - but I reckon Vistry could probably just pull the same trick they pulled this year of replacing private market demand with PRS and affordable. It wouldn't be zero effect, but it dampens it a lot.
nice write up. My concern is in trusting management as they said they had a one off profit warning and then announced another one a couple weeks later. Also the COO just stepped down. If Vistry can actually do what management thinks it can than the stock is incredibly cheap but I currently have little to no faith in management.
Thanks, I do like the protection that PRS offers. I am not as confident as everyone else seems to be that interest rates have dropped and will just stay low now, but also wouldn't assign much confidence to predicting interest rates going forward
With you there.
Hi, very good and insightful article. I don’t like $VTY.L because I think management targets are dishonest. After the recent drops, valuation is getting more reasonable. My questions are: given that market share among homebuilders is fairly stable at the top and the UK construction market is not much of a growth industry, do you think the valuation is that compelling? Isn’t the ROCE of 40% very exaggerated on a normalized basis? What do you think of management's talk of doubling output for an already large company? Isn’t the fact that they don’t own much land a bad thing for investors, since you have less margin of safety in terms of tangible assets to rely on? I own Crest Nicholson, which is the shittiest big construction company, but also the cheapest.
Have a nice day.
Thank you for the comment.
As explained, I think the affordable and PRS markets are set to become growth industries under Labour. Doubling output doesn't seem likely, but I think there is room for substantial growth over time (5-10% PA) if the funding is there for affordable development. If affordable and PRS expands compared to private, Vistry's market share will grow.
I'm not sure exactly what you mean by ROCE being exaggerated on a normalised basis - could you elaborate? Is this also what you mean when you say management targets are dishonest?
I don't think the fact they don't own land is a bad thing. NVR, the US housebuilder, pioneered the use of options to control land instead of buying it outright, and the stock is now up 1000x since 1996 (that's not a typo). Smaller land bank means higher ROCE, which means you can expand faster while returning more capital to shareholders. Sure, you don't have the hard-asset downside protection, but I'd rather have a PE of 10 at 2x book (20% ROE) than a PE of 10 at 1x book (10% ROE). Cash flows offer the downside protection, you don't always need hard assets.
Great report!!! 👏🏼
unbeliably good article!!! thanks mate!
Thank you!
I just thought I’d chime in and echo the appreciation of your analysis. Something I wish I had the time to research but with young kids every second is precious.
I popped this on my watchlist after the first profit warning and was reluctant to buy in due to the inevitably of a second PW. With the second warning out I feel the risk reward has started to become more appealing. South division aside, I particularly like the additional £8m cost issue disclosures, the reduction in completions and the downward revisions of PBT. Those items make me feel that the new forecasts are achievable -perhaps beatable if I’m being incredibly optimistic.
I completely agree that there seems to be a lot of criticism of the partnerships model however it doesn’t seem to be the cause of this issue, more likely poor estimating, cost reporting, mismanagement and perhaps a smidge of legacy brushing under the carpet. The criticism centres on inflationary pressures including the ENI contributions which seem relatively muted inputs from high level analysis I’ve conducted. I’m not sure if these commentators give enough weight to the fact that we’ve recently come through a period of unprecedented inflation and legislative change in the removal of rebated diesel use on construction sites. Short of another energy crisis it is likely that inflationary inputs will pale in comparison over the next few years. Simply stated any company that has come through the last few years with limited debt/ fundraising has demonstrated a resilience that makes me very comfortable. In addition it is front and centre of construction managers decision making and certainly more prevalent than it was pre 2020.
On a cautious note: one thing I’ll be keeping a close eye on is monthly and daily net debt as it would be reasonable to assume that as the partnerships model up front cash starts to come through the numbers that this figure will reduce -perhaps even dramatically.
These reasons, asset backing, shareholder returns along with many of the additional reasons for optimism (better researched and explained by you) are why I have taken a position and kept buying through the recent lows, I also like the idea that house builders should be relatively shielded from Trumps antics across the pond.
Labour have promised to catalyse house building and while it is apparent that it won’t trend close to their pre-election grandiosity, Vistry will most likely be swimming with the current all they now need to do is execute and under promise then over deliver for the next few reporting updates.
A super extensive analysis. Congratulations for the time you devoted on this. Not my cup of tea though. :-)
Thanks for the thorough overview. How do you think increasing interest rates could affect the business? This would put a dampener on private sales and typically bearish for house builders, but would the partnership model protect against this? Local authorities would be under even more pressure to provide affordable housing
If you're worrying about increasing interest rates I think you're about 2 years too late.
More generally - interest rates will go up and they'll go down, recessions will come and go, and people will continue needing housing. Particularly affordable housing. I'm not worried - this is a long term hold and they should do well through the cycle.
-
To answer your question though - rising rates affected 2023 numbers, but completions only fell 5% - and that was at the same time as a cost of living crisis and the end of Help To Buy. And that was, in total, a 515bps rise. I think it's unlikely we see much worse than that on the interest rate side, so I wouldn't stress. The other possibility is a major recession - but I reckon Vistry could probably just pull the same trick they pulled this year of replacing private market demand with PRS and affordable. It wouldn't be zero effect, but it dampens it a lot.