Temporary cost problems, misinterpreted by the market as a fundamental issue, have left this high-quality growth company at less than 8x underlying earnings.
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.
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
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.
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.
Love the write up I share your view and am deeply thankful for the research you did into this and the time obviously spent. Quick question in H1 2024 report there is an item mentioning 168m in issue capital, that doesn’t mean shares issued right? I’m sure I am just not fully familiar with UK accounting. Thank you!
Thanks Calvin. Issue capital is an item on the balance sheet and statement of equity - it represents all the proceeds from share issuance in the past, net of buybacks. That results from (a) the initial flotation and (b) more significantly, mergers in the past where they've paid with shares. In other words, it's mainly a hangover from the Galliford and Countryside mergers I discussed.
Thanks Matt for this very interesting write-up. Helped a lot. After conducting my own research I took a 50% position today at 630 GBX and are considering to add more.
I really dislike the board composition. None of the directos has a significant stake in the comany - Except Browning West. So fortunately, I came across the article above, which gives me confident that he will do everything he can to gain a decent ROI on his investment.
#2 Donwside risk seems very limited to me: It trades close to "Tangible net assets"/NAV. Also in all other valuatoin metrics it seems reasonable cheap. Ofc, it can always fall more
#3 Agree, capital allocation decisions of the last 7 years were not the best. No shareholder value was created - just management value in terms of size.... I hope this changes now with the Buy-Backs
#4 Catalysts: I like that there are multiple potential catalysts: Falling interest rates, inflection point in businss transformation, Buy-Backs, Increased push for affordable homs by labor party, less bad news.
#5 Gonçalo wanted to point out that the ROCE numbers are screwed. I agree with him. I don't like how they adjust their earnings and capital employed - especially when I want to consider it across industries. So 40% ROCE translates to me more to ~20% ROCE in real terms (unadjusted) and targeted adj Operating margin of 12% to ~8% to 9% Operating Margin (Annual Report 2023 - p. 30 ff is most relevant here)
#6 The tax rate is a bit annoying - paying 29% in income tax is a real downer!
Like always you can't have it all - I am following J. Greenblatt's approach here: If you focus on the downside the upside will usually take care of itself. I feel the downside is rather limited.
Hey, thanks for sharing your thoughts. When you say a 50% stake do you mean this is not 50% of your portfolio? If so, that's ballsy!
Agree that it's a shame most of the directors don't have shares. I would note that Fitzgerald is the chairman as well as CEO, so that makes 2. I believe Browning West was also successful in their activism at the master franchisee of Domino's in the UK (called Domino's Pizza Group, LON:DOM) - though I'll admit I haven't looked into it. Probably should.
I don't think the capital allocation decisions of the last 7 years created no value - both mergers were accretive to both earnings and business quality. The sector as a whole has had a pretty poor run in terms of stock prices, and Vistry had outperformed somewhat (before this debacle). But certainly they were less accretive than they could have been.
The ROCE numbers are before tax and exceptionals, yes. Exceptionals have historically been ~1% of revenue, excluding certain large merger-related charges which shouldn't recur barring yet another transformational merger. So on a 12% margin that would reduce EBIT by 8.7%. Then tax is another 29%. 40%*0.913*0.71 = 26% after tax and exceptionals, IF they were able to meet than 40% target. Looking at page 30, you have £46m of amortisation of acquired intangibles, which should be added back as it doesn't represent a future economic cost, and you also don't have the share of EBIT of JVs included in IFRS operating income - but I think pretty clearly that should be included. So IMO that's a case where the IFRS numbers are pretty misleading.
Would be interested to hear your thoughts, cheers!
Haha no no. My regular position size is 5%. So I took a 2.5% position as I didn't finish my research yet but couldn't resist the 630 GBX today.
Regarding value creation. I am not to deep in the housebuilding cycle but looking at revenue, earnings, and FCF on a per share basis there was no value creation. Even NAV per share declined by 3% annually from 2017 to 2024. I would have liked to see a smarter capital allocation approach to the Countryside deal (e.g. pay with debt + capital raise at a later time at a better share price). Hopefully, we are finally there. What's your email? Happy to share my little excel.
Interesting take on the ROCE numbers.
- I am discussing with myself what to do with the amortization of goodwill / intangibles? On the capital employed side: They invested Cash-flow to make sure they own this part of the business now. So wouldn't I just tweak my numbers when ignoring those locked-up capital? On the earnings side - though Cash-Out happened in the past somwhere we need to consider these costs of "paying up"....
- How is the EBIT of the JV added to the IFRS operating income - is it completely ignored?
On value creation, I wouldn't just take the pure FCF per share or EPS at face value. There are a couple reasons that comparing 2023's numbers to the present is not quite representative. First, 2018/19 was an exceptionally strong period for housebuilding, and the present environment is pretty weak. The industry as a whole is earning a lot less today than it did then. Second, they are in the process of winding down the higher-margin housebuilding business - the effect of this has begun to be felt on earnings, but has not yet been counteracted by a reduction in the share count as capital is freed up. Third, the transition to partnerships means earnings are of a higher quality than they were back when they were a bog standard housebuilder (of course, a pound is a pound - what I really mean by quality is that they'll be able to grow faster while paying out a higher percentage of earnings moving forward than they could in the past). As I mentioned, if we look at the two mergers in isolation, they were both somewhat EPS accretive - it's just that other things have been pulling in the opposite direction since then.
Goodwill is not amortised. But amortisation of other acquired intangibles should certainly be added back to earnings. It only represents them having paid a premium to book value in prior acquisitions, and has no bearing on their future. IF they were going to be a serial acquirer in the future, and continue buying more businesses at a premium, then it would be worth considering whether to include some of that amortisation charge, but I strongly suspect they're done with big mergers/acquisitions now for the foreseeable future.
Correct, share of JV EBIT is entirely ignored in IFRS operating income.
When Adam is talking about the business he mentiones that >70% ROCE (ofc adj.) has been done in the past. However, I can't find these figure when checking Countryside's annual reports. Do you have any idea?
Yeah. The numbers can be found in the annual reports - you have to find the partnerships-specific numbers, which are a bit of a needle in the haystack. If you go onto the 2019 report and Ctrl+F for “78.3%” I think you should find it, if I’m remembering the number correctly.
How do you think about the current Buy-Backs? I am wondering why they are only buying 47k of shares at 630 GBX? This would translate to "only" 75 M Pounds in Share-Buy Backs p.a. At current prices I would like to see Mgmt. buying back in the range of 150k to 300k shares. The float of approx 1.6M daily (sometimes >5M) would def. allow these numbers of Buy-Backs.
Yeah, their current buyback programme is for £300k of repurchases per day - this has been going on since before the share price dropped. I would love to see them step it up quite significantly right now as this level would only reduce shares by about 5% PA at current market cap. During the most recent call, when asked why they hadn’t paused the buyback programme given recent developments, Greg said he would rather increase it given current prices. I’m sure the board is receiving a lot of pressure from Browning West to do so. Not sure why it hasn’t happened yet, it does get on my nerves as it’s so obviously a great opportunity to increase intrinsic value per share.
Hi Matt, great write-up. I found it really valuable, you've done a lot of work. I was wondering if you could lend some insight into the 'Open Market / Private Buyer' part of the model. I understand this ~35% to be the conventional land acquisition + build part of Vistry, is that correct? So as much as there is a transition to the lower capital intensity partnership model, 35% of units are still the traditional house-building model? Thanks very much and again - congrats on the great work.
Thank you Justin, I appreciate it. You’re right that 35% of units (at least as a target - currently only 24%) are for open market speculative sale, like a normal housebuilder.
There are some things that make it a bit different though. First, these are not separate sites, but units within the same sites as the partnership units - so the land underneath these private units is still often purchased via a non-traditional model (which often means less time on the balance sheet, so higher ROIC).
Second, because they have some flexibility in that they can try to sell these private houses to a partner instead if they’re not selling in the open market, and because the smaller number of private units is easier to sell quickly without affecting prices than a larger number would be, they generally don’t have to follow this strategy of drip feeding the private units onto the market.
Both those factors, at least in theory, should mean even the economics of their open market sales are better than traditional house builders - though the world is a complex place and I do not actually know if it plays out that way in reality.
I would like to point out the expected GBP1b distribution is not only from housebuilding wind-down, but also from the normal distribution (50% of cash generated from operation).
Regarding the four ROC scenarios in your analysis, may I ask how aligned the assumptions are with the current terms in the market?
What are the non-exceptional exceptional costs you mentioned? does that include the fire safety provision?
I am wondering how do you view the trading update today. The partnership model sounds good, but the big question is on execution. Completion delay is likely to be more a repeating problem than the cost overrun of south division. Would the delays damage Vistry's reputation in the market? And whether the unattractive commercial terms Vistry sees now indicate an overall deteriorating environment of partnership business, such as inflated labor and material costs.
On the positive side, today's profit warning is only delay, meaning 2025 profit before tax would be improved by GBP50m, IF Vistry delivers what the management promised. Based on the information at this stage, I do not think Vistry's intrinsic value is furthered impaired, although my confidence in the management is somewhat weakened.
Good point on the £1b, I should have mentioned that.
On the ROC analysis, I just made up some numbers - I wanted to show that pre-payments and externally supplied land have the power the drive crazy ROICs. It was more about the qualitative understanding, though I felt the best way to convey it was with some numbers. The assumptions I used would lead to margins that are a lot higher than what we actually see.
With the nonexceptional exceptionals, I believe I excluded about two thirds of the fire safety provision, because those truly were exceptional expenses - everything else was included.
I'm fairly unsurprised by the trading update, to be honest. I suppose it's later than I would have expected - surely they knew more than 7 days before the end of the year that they'd do £250m, not £300m. But I was asking myself how they were managing to do so well when other BtR providers were struggling.
I would not expect the £50m to be fully shifted to next year. Some project costs, particularly labour, will continue accumulating as the project drags on. But maybe £20-30m will - materials, contracting which is done on a per unit rather than per-hour basis.
Based on what other housebuilders are saying as well as what is priced into the market, I would not expect FY25 to be too pretty.
Sometime in the next couple days, hopefully before market open on the 27th, I will be putting out a post with my full updated thoughts. Keep an eye out for it!
I am assuming given your views on VTY, you are optimistic on the outlook of the UK economy and interest rates, but amid recent GDP figures, and increased government borrowing, how much do you see interest rates dropping in 2025? The housebuilding sector is heavily correlated to interest rates and the UK10Y gilt is still very much elevated and is much higher than the consensus at the start of 2024. Labour is yet to lay out an actional set of plans to build the homes they promise.
So what is your thesis on rates retuning much lower by the end of year? Affordability is very much a big issue. If GDP continues to shrink and borrowing increases then it doesn't matter if BOE cuts, the gilt market will price in much higher rates.
I really don't care what interest rates do this year. I wouldn't think I'm significantly more optimistic on the UK economy than consensus, and I don't have any particular view on rates - happy to accept consensus there too.
In the write-up I explain that Vistry is far less subject to the health of the consumer because the majority of the homes it sells are to HAs and pension funds. While other developers saw 20-30% declines in units sold in 2023, Vistry saw just 5%. So not hugely concerned about rates.
Moreover, Vistry is in my opinion a fundamentally high quality business, trading well below 10x earnings. I think there's a strong chance that when Labour announce the affordable housing budget in 2025, it will be a significant jump from the last 5 years, and that should drive substantial growth for Vistry. But if I'm wrong on that, my downside is well protected by the very low valuation. Even if there is zero growth, they deserve a significantly higher valuation.
And for what it's worth, Labour are already being pretty aggressive with housing. They've changed the housing targets that LHAs set to legal requirements, and changed the way housing need is assessed so that the targets are higher. They've introduced more routes for developers to get homes built even if the LHA is being a shit. They've allocated the AHP budget an extra £0.5b for 2025. And they're opening up select parts of the green belt.
I think your overly optimistic view has come back to bite you. There's absolutely no chance in Labour achieving their 1.5m target and vistry with their own internal issues is proving this.
But for a more serious response - I said multiple times in the post that I did not believe there was any way Labour would hit that target. However, they haven’t even announced the affordable housing budget yet - they’re 6 months into their tenure, it makes very little sense to conclude now that they’ve failed. The current market weakness - which Vistry has been surprisingly resilient to - is in my view largely a result of the 10Y gilt moving up as the “higher for longer” mentality sets in. PRS effectively competes with gilts for pension fund money, and affordable needs debt to finance it, so both are heavily affected by a move in long term yields.
This is a long term play, and while recent results and guidance have certainly been weaker than I expected (an error on my part - I should have seen this coming), the thesis is still very much intact. The UK needs more affordable and PRS, and Vistry is best positioned to deliver it.
Thought this was an absolutely fantastic writeup that I stumbled upon on Twitter- thank you for writing it.
One question, though- when I look at their financial statements for the past few years, I am disheartened by the actual cash flows of the business. I had to go back to the 2022 full year results to find a half with actually positive operating cash flows. I suppose this capital intensity is of course to be expected for a land/homebuilding business, but still makes me hesitate to buy. How do you think about this- is there some expectation of a reversal of this trend, or will the "capex" continue as they look to future growth?
Hey John, thank you for the comment - glad to hear you liked it.
The trailing twelve months cash from operations (which is approximately equal to FCF) is £176m. Yes, 2023 had negative CFFO, but that was pretty anomalous - other than 2023, they've been cash flow positive every year since at least 2014 (the furthest back I looked). The half-year results are misleading, as housebuilding tends to see an investment in working capital in the first half and a release in the second half. H1'24's CFFO of -£72m was an almost £250m increase versus H1'23, at -£320m, so we're back to normal now.
Hi Matt - am I correct in thinking that Vistry (Bovis Homes) didn't really have a partnerships business until 2019? Is it fair to say that the financial results going back to 2014 are more reflective of a traditional home builder model?
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!
Great report!!! 👏🏼
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.
A super extensive analysis. Congratulations for the time you devoted on this. Not my cup of tea though. :-)
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.
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.
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.
Love the write up I share your view and am deeply thankful for the research you did into this and the time obviously spent. Quick question in H1 2024 report there is an item mentioning 168m in issue capital, that doesn’t mean shares issued right? I’m sure I am just not fully familiar with UK accounting. Thank you!
Thanks Calvin. Issue capital is an item on the balance sheet and statement of equity - it represents all the proceeds from share issuance in the past, net of buybacks. That results from (a) the initial flotation and (b) more significantly, mergers in the past where they've paid with shares. In other words, it's mainly a hangover from the Galliford and Countryside mergers I discussed.
Very impressed that you know that I aspire to have done this due diligence
Thanks Matt for this very interesting write-up. Helped a lot. After conducting my own research I took a 50% position today at 630 GBX and are considering to add more.
Some insights:
#1 Activist Browning West's fight at Gildan: https://financialpost.com/pmn/business-pmn/activist-browning-west-emerges-as-kingmaker-after-gildan-board-coup
I really dislike the board composition. None of the directos has a significant stake in the comany - Except Browning West. So fortunately, I came across the article above, which gives me confident that he will do everything he can to gain a decent ROI on his investment.
#2 Donwside risk seems very limited to me: It trades close to "Tangible net assets"/NAV. Also in all other valuatoin metrics it seems reasonable cheap. Ofc, it can always fall more
#3 Agree, capital allocation decisions of the last 7 years were not the best. No shareholder value was created - just management value in terms of size.... I hope this changes now with the Buy-Backs
#4 Catalysts: I like that there are multiple potential catalysts: Falling interest rates, inflection point in businss transformation, Buy-Backs, Increased push for affordable homs by labor party, less bad news.
#5 Gonçalo wanted to point out that the ROCE numbers are screwed. I agree with him. I don't like how they adjust their earnings and capital employed - especially when I want to consider it across industries. So 40% ROCE translates to me more to ~20% ROCE in real terms (unadjusted) and targeted adj Operating margin of 12% to ~8% to 9% Operating Margin (Annual Report 2023 - p. 30 ff is most relevant here)
#6 The tax rate is a bit annoying - paying 29% in income tax is a real downer!
Like always you can't have it all - I am following J. Greenblatt's approach here: If you focus on the downside the upside will usually take care of itself. I feel the downside is rather limited.
Hey, thanks for sharing your thoughts. When you say a 50% stake do you mean this is not 50% of your portfolio? If so, that's ballsy!
Agree that it's a shame most of the directors don't have shares. I would note that Fitzgerald is the chairman as well as CEO, so that makes 2. I believe Browning West was also successful in their activism at the master franchisee of Domino's in the UK (called Domino's Pizza Group, LON:DOM) - though I'll admit I haven't looked into it. Probably should.
I don't think the capital allocation decisions of the last 7 years created no value - both mergers were accretive to both earnings and business quality. The sector as a whole has had a pretty poor run in terms of stock prices, and Vistry had outperformed somewhat (before this debacle). But certainly they were less accretive than they could have been.
The ROCE numbers are before tax and exceptionals, yes. Exceptionals have historically been ~1% of revenue, excluding certain large merger-related charges which shouldn't recur barring yet another transformational merger. So on a 12% margin that would reduce EBIT by 8.7%. Then tax is another 29%. 40%*0.913*0.71 = 26% after tax and exceptionals, IF they were able to meet than 40% target. Looking at page 30, you have £46m of amortisation of acquired intangibles, which should be added back as it doesn't represent a future economic cost, and you also don't have the share of EBIT of JVs included in IFRS operating income - but I think pretty clearly that should be included. So IMO that's a case where the IFRS numbers are pretty misleading.
Would be interested to hear your thoughts, cheers!
Haha no no. My regular position size is 5%. So I took a 2.5% position as I didn't finish my research yet but couldn't resist the 630 GBX today.
Regarding value creation. I am not to deep in the housebuilding cycle but looking at revenue, earnings, and FCF on a per share basis there was no value creation. Even NAV per share declined by 3% annually from 2017 to 2024. I would have liked to see a smarter capital allocation approach to the Countryside deal (e.g. pay with debt + capital raise at a later time at a better share price). Hopefully, we are finally there. What's your email? Happy to share my little excel.
Interesting take on the ROCE numbers.
- I am discussing with myself what to do with the amortization of goodwill / intangibles? On the capital employed side: They invested Cash-flow to make sure they own this part of the business now. So wouldn't I just tweak my numbers when ignoring those locked-up capital? On the earnings side - though Cash-Out happened in the past somwhere we need to consider these costs of "paying up"....
- How is the EBIT of the JV added to the IFRS operating income - is it completely ignored?
Got you, that makes more sense.
On value creation, I wouldn't just take the pure FCF per share or EPS at face value. There are a couple reasons that comparing 2023's numbers to the present is not quite representative. First, 2018/19 was an exceptionally strong period for housebuilding, and the present environment is pretty weak. The industry as a whole is earning a lot less today than it did then. Second, they are in the process of winding down the higher-margin housebuilding business - the effect of this has begun to be felt on earnings, but has not yet been counteracted by a reduction in the share count as capital is freed up. Third, the transition to partnerships means earnings are of a higher quality than they were back when they were a bog standard housebuilder (of course, a pound is a pound - what I really mean by quality is that they'll be able to grow faster while paying out a higher percentage of earnings moving forward than they could in the past). As I mentioned, if we look at the two mergers in isolation, they were both somewhat EPS accretive - it's just that other things have been pulling in the opposite direction since then.
Goodwill is not amortised. But amortisation of other acquired intangibles should certainly be added back to earnings. It only represents them having paid a premium to book value in prior acquisitions, and has no bearing on their future. IF they were going to be a serial acquirer in the future, and continue buying more businesses at a premium, then it would be worth considering whether to include some of that amortisation charge, but I strongly suspect they're done with big mergers/acquisitions now for the foreseeable future.
Correct, share of JV EBIT is entirely ignored in IFRS operating income.
I assume you watched the following video.
https://www.youtube.com/watch?v=_W60Cmy3tbU
When Adam is talking about the business he mentiones that >70% ROCE (ofc adj.) has been done in the past. However, I can't find these figure when checking Countryside's annual reports. Do you have any idea?
Yeah. The numbers can be found in the annual reports - you have to find the partnerships-specific numbers, which are a bit of a needle in the haystack. If you go onto the 2019 report and Ctrl+F for “78.3%” I think you should find it, if I’m remembering the number correctly.
Thanks a lot Matt for your insights.
How do you think about the current Buy-Backs? I am wondering why they are only buying 47k of shares at 630 GBX? This would translate to "only" 75 M Pounds in Share-Buy Backs p.a. At current prices I would like to see Mgmt. buying back in the range of 150k to 300k shares. The float of approx 1.6M daily (sometimes >5M) would def. allow these numbers of Buy-Backs.
Yeah, their current buyback programme is for £300k of repurchases per day - this has been going on since before the share price dropped. I would love to see them step it up quite significantly right now as this level would only reduce shares by about 5% PA at current market cap. During the most recent call, when asked why they hadn’t paused the buyback programme given recent developments, Greg said he would rather increase it given current prices. I’m sure the board is receiving a lot of pressure from Browning West to do so. Not sure why it hasn’t happened yet, it does get on my nerves as it’s so obviously a great opportunity to increase intrinsic value per share.
Such a high quality exhaustive write up Matt, well done !
Thanks Aamir, really appreciate it!
unbeliably good article!!! thanks mate!
Thank you!
Great write-up and interesting comments in the discussion. Thanks for sharing!
Hi Matt, great write-up. I found it really valuable, you've done a lot of work. I was wondering if you could lend some insight into the 'Open Market / Private Buyer' part of the model. I understand this ~35% to be the conventional land acquisition + build part of Vistry, is that correct? So as much as there is a transition to the lower capital intensity partnership model, 35% of units are still the traditional house-building model? Thanks very much and again - congrats on the great work.
Thank you Justin, I appreciate it. You’re right that 35% of units (at least as a target - currently only 24%) are for open market speculative sale, like a normal housebuilder.
There are some things that make it a bit different though. First, these are not separate sites, but units within the same sites as the partnership units - so the land underneath these private units is still often purchased via a non-traditional model (which often means less time on the balance sheet, so higher ROIC).
Second, because they have some flexibility in that they can try to sell these private houses to a partner instead if they’re not selling in the open market, and because the smaller number of private units is easier to sell quickly without affecting prices than a larger number would be, they generally don’t have to follow this strategy of drip feeding the private units onto the market.
Both those factors, at least in theory, should mean even the economics of their open market sales are better than traditional house builders - though the world is a complex place and I do not actually know if it plays out that way in reality.
Thanks Matt. Those are important differences, appreciate you highlighting them.
Thank you for the very good writeup.
I would like to point out the expected GBP1b distribution is not only from housebuilding wind-down, but also from the normal distribution (50% of cash generated from operation).
Regarding the four ROC scenarios in your analysis, may I ask how aligned the assumptions are with the current terms in the market?
What are the non-exceptional exceptional costs you mentioned? does that include the fire safety provision?
I am wondering how do you view the trading update today. The partnership model sounds good, but the big question is on execution. Completion delay is likely to be more a repeating problem than the cost overrun of south division. Would the delays damage Vistry's reputation in the market? And whether the unattractive commercial terms Vistry sees now indicate an overall deteriorating environment of partnership business, such as inflated labor and material costs.
On the positive side, today's profit warning is only delay, meaning 2025 profit before tax would be improved by GBP50m, IF Vistry delivers what the management promised. Based on the information at this stage, I do not think Vistry's intrinsic value is furthered impaired, although my confidence in the management is somewhat weakened.
Good point on the £1b, I should have mentioned that.
On the ROC analysis, I just made up some numbers - I wanted to show that pre-payments and externally supplied land have the power the drive crazy ROICs. It was more about the qualitative understanding, though I felt the best way to convey it was with some numbers. The assumptions I used would lead to margins that are a lot higher than what we actually see.
With the nonexceptional exceptionals, I believe I excluded about two thirds of the fire safety provision, because those truly were exceptional expenses - everything else was included.
I'm fairly unsurprised by the trading update, to be honest. I suppose it's later than I would have expected - surely they knew more than 7 days before the end of the year that they'd do £250m, not £300m. But I was asking myself how they were managing to do so well when other BtR providers were struggling.
I would not expect the £50m to be fully shifted to next year. Some project costs, particularly labour, will continue accumulating as the project drags on. But maybe £20-30m will - materials, contracting which is done on a per unit rather than per-hour basis.
Based on what other housebuilders are saying as well as what is priced into the market, I would not expect FY25 to be too pretty.
Sometime in the next couple days, hopefully before market open on the 27th, I will be putting out a post with my full updated thoughts. Keep an eye out for it!
Looking forward to your update
I am assuming given your views on VTY, you are optimistic on the outlook of the UK economy and interest rates, but amid recent GDP figures, and increased government borrowing, how much do you see interest rates dropping in 2025? The housebuilding sector is heavily correlated to interest rates and the UK10Y gilt is still very much elevated and is much higher than the consensus at the start of 2024. Labour is yet to lay out an actional set of plans to build the homes they promise.
So what is your thesis on rates retuning much lower by the end of year? Affordability is very much a big issue. If GDP continues to shrink and borrowing increases then it doesn't matter if BOE cuts, the gilt market will price in much higher rates.
I really don't care what interest rates do this year. I wouldn't think I'm significantly more optimistic on the UK economy than consensus, and I don't have any particular view on rates - happy to accept consensus there too.
In the write-up I explain that Vistry is far less subject to the health of the consumer because the majority of the homes it sells are to HAs and pension funds. While other developers saw 20-30% declines in units sold in 2023, Vistry saw just 5%. So not hugely concerned about rates.
Moreover, Vistry is in my opinion a fundamentally high quality business, trading well below 10x earnings. I think there's a strong chance that when Labour announce the affordable housing budget in 2025, it will be a significant jump from the last 5 years, and that should drive substantial growth for Vistry. But if I'm wrong on that, my downside is well protected by the very low valuation. Even if there is zero growth, they deserve a significantly higher valuation.
And for what it's worth, Labour are already being pretty aggressive with housing. They've changed the housing targets that LHAs set to legal requirements, and changed the way housing need is assessed so that the targets are higher. They've introduced more routes for developers to get homes built even if the LHA is being a shit. They've allocated the AHP budget an extra £0.5b for 2025. And they're opening up select parts of the green belt.
I think your overly optimistic view has come back to bite you. There's absolutely no chance in Labour achieving their 1.5m target and vistry with their own internal issues is proving this.
Ah, don’t kick a man when he’s down!
But for a more serious response - I said multiple times in the post that I did not believe there was any way Labour would hit that target. However, they haven’t even announced the affordable housing budget yet - they’re 6 months into their tenure, it makes very little sense to conclude now that they’ve failed. The current market weakness - which Vistry has been surprisingly resilient to - is in my view largely a result of the 10Y gilt moving up as the “higher for longer” mentality sets in. PRS effectively competes with gilts for pension fund money, and affordable needs debt to finance it, so both are heavily affected by a move in long term yields.
This is a long term play, and while recent results and guidance have certainly been weaker than I expected (an error on my part - I should have seen this coming), the thesis is still very much intact. The UK needs more affordable and PRS, and Vistry is best positioned to deliver it.
Thought this was an absolutely fantastic writeup that I stumbled upon on Twitter- thank you for writing it.
One question, though- when I look at their financial statements for the past few years, I am disheartened by the actual cash flows of the business. I had to go back to the 2022 full year results to find a half with actually positive operating cash flows. I suppose this capital intensity is of course to be expected for a land/homebuilding business, but still makes me hesitate to buy. How do you think about this- is there some expectation of a reversal of this trend, or will the "capex" continue as they look to future growth?
Hey John, thank you for the comment - glad to hear you liked it.
The trailing twelve months cash from operations (which is approximately equal to FCF) is £176m. Yes, 2023 had negative CFFO, but that was pretty anomalous - other than 2023, they've been cash flow positive every year since at least 2014 (the furthest back I looked). The half-year results are misleading, as housebuilding tends to see an investment in working capital in the first half and a release in the second half. H1'24's CFFO of -£72m was an almost £250m increase versus H1'23, at -£320m, so we're back to normal now.
Hi Matt - am I correct in thinking that Vistry (Bovis Homes) didn't really have a partnerships business until 2019? Is it fair to say that the financial results going back to 2014 are more reflective of a traditional home builder model?