You can see why Vistry isn’t willing to hang on for a recovery in the housing market, even by 2025. That was the proposed deadline for a decision on whether to stick with or hive off its private housebuilding business from its core affordable housing unit, if the share price is still in the doldrums.
By switching sites that had been earmarked for building homes for the open market to mixed-tenure development, Vistry will focus solely on partnership work, a lower-risk approach than trying to find a buyer for the private housebuilding business. The shift, under which 32 sites will be cut down to 27, should be completed by Christmas.
A near-13 per cent share price bump has closed the discount embedded against the book value forecast at the end of this year. That also leaves the shares trading at ten times forward earnings, the highest level since June 2021. Investors are betting that lower exposure to the open market will make profits more reliable.
There is some weight to that assumption. The partnership business develops sites with a mixture of open market, affordable and private rental homes, on behalf of housing associations, authorities and large residential landlords. Schemes are less capital-intensive than purely private house building because its partners stump up some of the funding. At least half of the plots are pre-sold, a benchmark that Vistry wants to increase to 65 per cent.
Housing associations typically sign-up two years in advance. Vistry is hoping to move towards a planning system, whereby private landlords commit five years ahead of time. Compare that with the open market, where visibility over revenue is minimal and housebuilders are at the mercy of affordability constraints.
Vistry is hoping to boost its return on capital expenditure to 40 per cent. Tying up less capital also means shareholders should be in line for £1 billion in capital returns over the next three years, in ordinary dividends, special returns, share buybacks or a mixture of the three. Analysts at HSBC think that will break down as £660 million handed back in ordinary dividends and £340 million in surplus returns between next year and 2026, and 290p a share in ordinary dividends alone over the three years. That is in addition to returning the FTSE 250 constituent to a net cash position, reversing its net debt of £328 million at the end of June.
Its private housebuilding business has already been reduced to just under half of group revenue. Completions were down by just over a fifth in the first six months of the year, which contributed to an erosion of overall operating margin.
However, the new structure won’t be free of challenges accompanying the housing cycle. About 35 per cent of completions will be sold on the open market. Private rental landlords account for roughly 10 per cent at present, a slice Greg Fitzgerald, Vistry’s boss, hopes to increase to between 20 per cent and 30 per cent in time. Those institutional investors are hardly free from the funding constraints that have accompanied rapidly rising interest rates.
In rough times, the shift from the open market is an easier sell to investors. The trade-off is a lower operating margin, which Vistry is targeting at 12 per cent, down from the 14.7 per cent of last year. Revenue growth is also expected to be more subdued off a larger base, at 5 per cent to 8 per cent over the next three years, compared with a previous target of 10 per cent for the partnership unit. While builders’ dividends have rapidly diminished, Vistry’s promise of generous cash returns will become its biggest appeal.
ADVICE Hold
WHY Investors could be in line for generous dividends and share buybacks, but the shares trade at a premium to the sector
WH Smith
What WH Smith has — and what most British retailers lack — is a visible flightpath to growth. It is pursuing rapid expansion in North American airports, a move that has charged its top line and has prompted the company to upgrade its forecasts for this year three times already.
Fourth-quarter trading figures were not accompanied by another boost to its predictions, however. That explains a cold response to its pre-close update. Another was sales growth for its North American travel business that was weaker than expected, increasing on an underlying basis by 3 per cent over the six months to the end of August. That, though, reflects the shape of the recovery in the global travel market.
In the United States, it is up against tough comparisons, a market that loosened travel restrictions earlier than other jurisdictions. A delayed recovery has been reflected in like-for-like sales growth of 27 per cent in the “rest of the world” as markets kept more stringent requirements in place for cross-border travellers for longer.
Its focus on airport expansion has put WH Smith less at the mercy of the fortunes of the British high street, as well as national rail strikes. Industrial action is unhelpful, but the division accounts for no more than 7 per cent of the total operating profit.
The company is not overstretching, either. A jump in the number of new stores opening worldwide, which should total 112 this year, means that capital expenditure is set to rise to £150 million, almost twice last’s outlay, before falling back in 2024 to roughly £100 million. It had roughly £270 million in liquidity at the end of February, but it is also back generating cash, which analysts at Peel Hunt think will amount to £240 million. The retailer is now just above the top end of its target leverage range of between 0.75 and 1.25. That means there could be more cash returns when it announces full-year figures in November, according to analysts at RBC Capital.
Improving cash returns could provide another catalyst for WH Smith shares.
ADVICE Buy
WHY Expansion into international airports could provide durable growth
