ii view: Vistry’s mistake triggers profit warning plunge

Trading update and profit guidance

• Now expects full-year 2024 adjusted pre-tax profit of around £350 million, down from City estimates of £434 million
• Continues to expect full-year 2024 build completions of more than 18,000, up from 16,118 in 2023
• Continues to expect a net cash position as of 31 December 2024, up from net debt of £89 million as of 31 December 2023

ii round-up:

Partnership housebuilder Vistry Group (LSE:VTY) today announced that due to cost oversights, adjusted pre-tax profit for 2024 is now expected to come in at around £350 million. That’s down from City estimates of £434 million.

Vistry has recently discovered that within its South Division, total full-life cost projections to complete nine out of the division’s 46 developments, including some large-scale schemes, have been understated by around 10% of the total build costs.

Shares in the FTSE 250 housebuilder tumbled 30% in UK trading having come into this latest news up by around 39% year-to-date. That’s comfortably ahead of an approximate 20% gains for more traditional housebuilders Bellway (LSE:BWY) and Persimmon (LSE:PSN) over that time. The FTSE 250 index is up 6% in 2024. 

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Selling across the three brands of Bovis, Linden and Countryside Homes, Vistry previously detailed a strategy to focus on affordable housing, partnering with organisations such as local authorities and housing associations to develop mixed tenure homes such as shared ownership.

Vistry operates across six divisions, with the build cost underestimates at the nine developments in question part of 300 developments across the company.

As well as reducing management’s profit forecast by £80 million for this year, Vistry also estimates a profit impact of £30 million for 2025 and £5 million in 2026.

Vistry believes that issues are confined to the South Division. Management changes at the division are underway, with an independent review now investigating the causes.

Group wide build completions for the current year are still expected to exceed 18,000, up from 16,118 in 2023, with a year-end net cash position still being targeted compared to net debt of £89 million at the end of 2023. 

Vistry remains committed to the £130 million share buyback programme announced at its interim results on 5 September. A trading update is scheduled for 8 November. 

ii view:

Formerly Bovis Homes and headquartered in Kings Hill, Kent, Vistry employs around 4,500 people. It works with more than 150 housing providers across the country, including local authorities, for-profit registered providers and private rented sector bodies. It also operates three factories producing timber frame panels for its homes. 

For investors, failures to correctly forecast costs now dents trust in group-wide estimates. The profit impact also runs into fiscal years 2025 and 2026. The potential for unemployment to rise, impacting the bill paying ability of both renters and homeowners alike, warrants consideration, while any strong recovery in the housing market will potentially see traditional rivals benefitting more than Vistry, given its partnership model. 

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On the upside, divisional management changes are being made. Vistry remains confident in its medium-term target for £800 million of adjusted operating profit and £1 billion of capital distributions to shareholders. Its more affordable housing product is likely to continue appealing to consumers, while ongoing cash generation is expected to push it into a net cash position, with the payment of shareholder returns via share buybacks or dividends potentially giving it more flexibility. 

In all, Vistry’s exposure to affordable housing, supportive government policy, and a forecast income yield of over 3% continue to offer appeal. That said, this shock profit warning will take time to recover from. While some investors will be happy to speculate that the initial reaction is overdone, others will likely wait for evidence of stability before considering taking an interest.   

Positives: 

• Differentiated business model
• Recent industry consolidation

Negatives:

• Reduced business diversity
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold