Vistry Group PLC ($VTY.L) quick thoughts

Is the thesis broken, or is this a great company at a great price? 647 GBX

Vistry Group PLC is a British homebuilder which had a big run up in share price from 2023 until early October of this year, and then has had a spectacular fall. Is the thesis broken, or is this a great company trading at an attractive price or better at the last close of 647.00 pence?

The enthusiasm seemed to stem from the fact that Vistry was slowly closing down its traditional homebuilding business and focusing on its “partnerships” business: after purchasing Countryside, Vistry has a dominant position in the partnerships business, which uses less capital than a traditional homebuilder and has higher returns on capital. One thesis was that the freed up capital from the traditional homebuilding business would be used to buy back shares, resulting in a far better business and a continued increase in the share price. So as not to duplicate background material, I refer you to the outstanding interview by Andrew Walker of David Capital released January 7, 2024. I’ll note that there are some excellent and informative comments on Vistry at ValueInvestorsClub.com around that time as well.

What triggered the initial share price decline in October was a Trading Update from Vistry that certain projects in the South Division were priced about 10-12% below their total cost, that earnings would be significantly lower in 2024 and 2025, and slightly lower in 2026 due to the inaccurate budgeting. They also announced that they’d do a thorough review of all projects with an outside auditor.

A further decline occurred when Vistry reported earlier in November that the underestimates were somewhat worse than originally estimated. You can look at the numbers in the two company releases. The Vistry share price collapsed further. Some discussion of the Vistry situation can be found in a UK trade press article here.

To make a long story short, as I posted on Twitter, I thought that the share price decline in October was mostly justified. As of the November 22, 2024 close, I think that it depends on one’s time horizon: in the next 6-12 months, I think it’s worse for the share price. In addition to the earnings miss, my understanding is that Vistry will probably get dropped from the LSE 100 in December due to its smaller market cap. I also think that it lengthens the likely holding period for a good outcome. This is not investment advice, but I am betting that the outlook for Vistry 3-5 years out is better now than it was when the initial Trading Update was released in October and will result in an attractive return from the current 847 GBX price. The business has been internally and externally reviewed, the problems were reportedly only in the traditional homebuilding business being wound down, and the partnerships business contracts are being written consistently with a 40% ROE floor. And they are winning business, becoming the UK’s builder of the most homes during this year.

Some additional notes:

* I assess that Vistry has a strong moat. It looks like the business going forward gets excellent returns on equity.

* They have the reputation to be a strong competitor nationwide. The incentives of decision-makers to go with the company with the best reputation is strong which makes for a nice intangible asset.

* The partnerships business requires multi-year planning and a fairly complex set of steps. Vistry has developed systems, personnel and scale to make the projects work. This makes for somewhat of a process moat.

* They have the scale and infrastructure which provides a cost advantage to be a strong competitor nationwide. The scale and predictability helps to get the best contracts with sub-contractors, and the factories to pre-fabricate parts to reduce waste and especially labor hours; parts can be pre-built in factories with fewer labor hours than on site.

* The CEO is somewhat controversial. He’s hard charging. Some folks don’t like it that he’s also the Executive Chair of the board of directors. Some blame him for the cost overruns. He seems to have an ego that rubs some people the wrong way. I mostly like that he’s the CEO. I don’t know him personally, but he seems to get to the main point, is focused and determined. His track record seems quite good. The only thing that is a bit bothersome to me are some related party transactions. See The Times article for more. He has been involved in the industry his entire career, so part of it is acceptable. It would be cleaner and probably better if he weren’t. But it’s not a deal breaker for me at this point.

* I am long as of today, with no plans to sell this year. That could change in an instant. Not investment advice. Do your own due diligence.