The shift towards partnership work has paved the way for Vistry’s rehabilitation since its chief executive Greg Fitzgerald was tasked with reviving the fortunes of the company, then known as Bovis Homes, in 2017. Snapping up its rival Countryside Partnerships could help the FTSE 250 housebuilder retain more of the ground gained against a likely weakening in the housing market.
Greater exposure towards building houses in partnership with housing associations and the private rental sector has earned Vistry a premium rating compared with most other housebuilders. The benefit of the partnership model? The chance to generate a higher return on capital employed, since registered housing providers put up part of the capital to complete developments, and potentially less volatile demand than the private housing market.
A £1.3 billion share and cash merger with struggling Countryside would create a company with revenue of £4.2 billion, 45 per cent of which would come from partnership work, compared with 32 per cent for Vistry as a standalone company. The hope is that the partnership business would account for more than 50 per cent of group revenue by 2024.
That business already generates a return on capital employed of more than 40 per cent for Vistry, but it reckons it can pull Countryside’s partnership business up to the same level. One way is selling whole blocks of new housing or flats to the private rental sector to free up capital tied up in developments. Another would be to only acquire partnership sites that are at least 50 per cent pre-sold to housing associations or PRS, both things that Countryside does not currently do.
Taking on Countryside’s higher-margin mixed tenure sites, a combination of private, PRS and affordable housing, should help boost the operating margin to 12 per cent.
Countryside’s poorly executed acquisition of Westleigh Homes in 2018 could haunt the enlarged company. During the first half, Countryside was forced to stomach a £72 million goodwill impairment and a £5 million charge relating to the closure of 80 former Westleigh development sites. A review by Countryside of all its sites found that it had not only failed to realise the benefits of its Westleigh acquisition but had been overambitious in expanding into new regions. Will the enlarged company be forced to write down the value of more sites?
There is also the question of what price the enlarged group will achieve for the land and sites that come with Countryside’s private housebuilding arm, which it hopes to sell within two years in order to pay back the £300 million debt that it has taken on to help fund the merger.
The enlarged group will generate roughly 55 per cent of revenue from private house building when the deal completes, and so will still be at the mercy of fluctuations in demand and sales from owner-occupiers — just as interest rates are forecast to rise to more than 4 per cent next year and inflation remains heightened.
Vistry is managing cost inflation. Selling prices are 10 per cent above 2019 levels, more than enough to offset build cost inflation at 8 per cent. However, sales prices are likely to cool, and the private weekly sales rate stood at 0.78 for the financial year to date — 4 per cent growth compared with the prior year. Given sales were up 11 per cent over the year to the end of June, this implies a material slowdown over the past two months, points out brokerage Davy.
All housebuilders face mounting challenges, but the Countryside deal could forge a smoother path to Vistry’s shares re-rating in the medium-term.
ADVICE Hold
WHY Increasing the proportion of higher-returning and more defensive partnership work could earn the shares a higher price
Safestore
The stellar run in Safestore’s shares has been cut short by two stumbling blocks. The first was a shift away from stocks priced for high future growth; and the second is the expectation that a downturn in the economy could stifle demand for self-storage space, which has benefited in part from a booming housing market.
Average rental rates continued to climb for the self-storage company, which leases space across the UK, Spain and Paris, during the three months to the end of July, up 13 per cent on an underlying basis. However, the occupancy rate declined to 85.7 per cent, from 87 per cent at the end of July last year. An increase in the proportion of domestic, or household, customers, which let smaller units than business, has played a part, according to Frederic Vecchioli, the chief executive. The plus side? Smaller units typically generate a higher rate per square foot.
Safestore’s shares are still priced for high growth, at a 59 per cent premium to the net asset value forecast at the end of October, down from an eye-watering peak of 250 per cent in January. The question is to what extent a contraction in the economy causes occupancy to decline and/or rates to shrink if the group has to offer higher discounts to gain new business.
Safestore has some line of sight over future revenue. Roughly 70 to 80 per cent of revenue is from customers that moved in during the prior financial year, with the average business customer renting space for 28 months and the average domestic customer for 22 months. Yet analysts at the brokerage Numis expect pre-tax profit growth to slow to 14 per cent during the next financial year, from 24 per cent this year.
What about demand for new developments? Safestore has 1,073,000 sq ft of space in renovation or development, representing around 14 per cent of the existing portfolio. Cost inflation on newbuilds is running at around 20 per cent, and 9-10 per cent for conversions. Any downturn in rental rates could squeeze the returns that the group makes on those new developments.
A beefy premium is harder to justify for the shares than it was 12 months ago.
ADVICE Hold
WHY High premium versus NAV is not attractive
