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EMMA POWELL | TEMPUS

Vistry: Housebuilder with a split personality

The Times

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The UK housing market is on shaky foundations. Vistry is attempting to convince investors that its tilt towards building homes for housing associations and private landlords makes it more durable to shocks.

There is some weight to that argument. Completions will come in around 16,000 this year, lower than the 18,000 guided at the time of the tie-up with Countryside Partnerships last year and lower than a like-for-like figure of 17,000 last year. That is a far less dramatic decline than that expected by some housebuilders purely selling into the private housing market. Take Persimmon, which has pointed towards a fall in completion volumes of 40 per cent this year.

The fall reflects a dial-back in building homes for the owner-occupied market and flat output for the partnership business, which builds houses and flats for housing associations, local authorities and private rental landlords. The latter accounts for just under half of Vistry revenues post-merger. Adjusted profits are expected to come in at somewhere over £440 million, down more than 20 per cent on proforma profits of £568 million last year, albeit better than analysts had expected. Why is that fall double the decline in completions? That has something to do with adding the less profitable Countryside housebuilding business into the mix. How achievable is that profit target? It is predicated on private sales rates over the first three months edging back towards 2019 levels during the rest of this year.

Partnership work is lower-margin but should generate higher returns on capital since local authorities and housing associations stump up some of the funds for development. Vistry also buys sites that are at least half sold, which is expected to hold the average sales prices across the partnership business steady this year.

But Vistry’s private arm is still exposed to the same price pressure as the rest of the big housebuilders. Average prices are expected to take a hit, with the average for owner-occupied homes forecast to come in at £365,000 this year, down from £376,000 last year. What’s more, the housebuilder is offering free fixtures and fittings on all the houses it now sells, according to Greg Fitzgerald, Vistry boss. Still, there is a level of breathing room built into those forecasts, which are between 4 and 5 per cent below asking prices. There are no plans to come out of the land market this year, with the amount of cash spent on land to build houses and flats on behalf of housing associations and local authorities set to rise by 15-20 per cent, even if the outlay on land for private ownership will fall by about 10 per cent.

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Acquisition costs have already contributed towards a halving in the net cash position, at £118 million. But investors can expect the group to swing to a net debt position by the end this year, coming in at about £100 million, after land buying. That is in sharp contrast to the meaty cash piles on the books of most London-listed housebuilders. A weaker balance sheet may be why investors have been loath to afford Vistry a higher rating, which also trails most of the sector. The shares trade at just under six times forward earnings and a discount of almost 40 per cent to the book value forecast by analysts at the end of this year.

Fitzgerald has a handy get-out if the share price performance doesn’t revive over the next couple of years, leaving the option to split the housebuilding business from its partnership operations. That idea could gather speed, given the US hedge fund Browning West is Vistry’s largest shareholder. Pre-merger, the activist had called on Countryside to sell its housebuilding arm. Vistry might be holding up better than feared, but it is not shake-proof.
ADVICE
Hold
WHY The shares are cheaply valued, but that is justified, given weaker and uncertain earnings prospects

Octopus Titan VCT
The collapse of the US-based Silicon Valley Bank and removal of another funding line for start-ups has further shaken confidence in the venture capital industry. The sector was already under pressure from rapidly rising interest rates, which have driven down the previously racy valuations of early-stage companies.

Octopus Titan VCT, the largest venture capital trust listed in London, has faced its own reckoning. The shares have declined by almost a quarter since the start of last year, as easy money started to dry up.

Octopus is known as a generalist fund, investing in about 115 start-ups across six specialist teams, including medtech, fintech and consumer companies across the tech sector. But by its very nature as a VCT, the investment focus is narrow and laden with risk. The charges are also chunky, at 2 per cent plus a 20 per cent performance fee.

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VCTs have grown in popularity among wealthier investors, given 30 per cent income tax relief is available on up to £200,000 invested in these funds each year, provided the investment is held for five years. That provided a buffer against any losses. But losses are mounting. Last year, the trust’s net asset value slid more than 22 per cent.

The trough is not likely not to come until interest rates peak, reckons Malcolm Ferguson, the fund’s lead manager. Putting a finger on when that might be has become trickier in the wake of the banking crisis.

Higher rates have narrowed exit routes to offload investments, but should mean the prices secured are also lower. In 2021 the fund realised £200 million in exit proceeds, but by halfway through last year, that figure stood at only £50 million. And that was before the chaos of the mini-budget and banking saga.

The trust aims to pay a recurring annual dividend of 5p a share, funded through selling investments. Given the market for M&A has dried up, you could expect some of the returns to shareholders to be funded from its distributable reserves.

VCTs only raise a set amount of cash each year. The next application deadline for Octopus is March 31. Investors would do well to think twice about getting involved.
ADVICE
Avoid
WHY There is plenty of scope for the value of its assets to fall further

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