Vistry Group
First the 90 seconds pitch à la Bill Miller followed by the long pitch.
I want to talk to you about Vistry Group. It's a UK homebuilder trading significantly below its fair value. I think it's a buy for the following five reasons:
Strategic transformation to a pure-play, capital-light partnerships model focusing on affordable housing, addressing the UK's 4-6 million home deficit.
Partnerships model pre-sells over 50% of homes, reducing market cyclicality exposure and enhancing ROCE.
Strong financial position with £4.8 billion in forward sales, up 12% year-on-year, and lower expected net debt.
Isolated and fixable issues in the South Division, with effective remediation plans in place.
Significant insider buying and investment from respected firms like Browning West and Abrams Capital Management.
The stock is currently undervalued due to recent profit warnings. I think it has substantial upside potential as the South Division issues are resolved and the transformation progresses.
Risks include:
Execution risks in fixing South Division issues
Potential market cyclicality in the housing sector
Regulatory changes affecting the affordable housing market
that’s it!
Executive Summary
Vistry Group presents a compelling investment opportunity despite recent operational challenges. The company's strategic pivot to a capital-light partnerships model uniquely positions it to address the UK's critical affordable housing shortage. Key points include:
1. Strong institutional investor backing and insider confidence
2. Stable, capital-efficient business model similar to successful U.S. homebuilders
3. Swift and comprehensive response to isolated operational issues
4. Attractive valuation and strong financial position
5. Commitment to shareholder returns
Vistry offers a rare combination of stability and growth potential in the UK housing market. For long-term investors, it represents an opportunity to capitalize on the persistent demand for affordable housing, with significant value creation potential as the company executes its strategic transformation.
A link to a PDF is available at the end of the post!
Vistry Group, a prominent UK homebuilder, has embarked on a transformative journey since late 2023, positioning itself to address the UK's significant affordable housing deficit. Despite recent challenges, Vistry remains an attractive investment opportunity due to its strategic shift towards a pure-play, capital-light partnerships model. This analysis examines Vistry's enduring strengths, the temporary nature of its setbacks, and its potential for sustained growth and value creation.
Before we get into the company details, let’s review who owns the shares (source: Bloomberg)…
Browning West has a concentrated fundamental-based strategy and has been successful in its recent activist campaign at Gildan Activewear.
Abrams Capital Management is a Baupost Alumni whose principal was considered by S. Klarman has the most brilliant analyst he ever met (here below it performance based on 13F fillings(source: Bloomberg))
David Capital has a majority of its AUM in Vistry.He articulated his rationale here
Farallon is also invested
And how insiders have reacted to the recent setbacks? As you can see, they have been historically relatively good at picking up bottoms, especially when they were aggressive
Now to the beef…
Strategic Transformation
Vistry unveiled a plan to become the UK's largest pure-play, capital-light housebuilder focused on affordable housing through partnerships.
The UK faces a housing deficit of 4-6 million homes, creating substantial long-term demand.
Partnerships Model Advantages
Collaborations with local authorities, housing associations, and financial institutions.
Pre-selling over 50% of homes reduces exposure to market cyclicality and interest rate fluctuations.
Capital-light approach enhances return on capital employed (ROCE) and generates stable earnings.
Similar to the successful strategy of U.S. homebuilder NVR (see the appendix for a surprise).
Financial Projections
Plans to free up over £1 billion in cash from repurposing traditional housebuilding segment.
Intention to return capital to shareholders via buybacks over three years.
Bullish outlook projected a fair value estimate multiple times the share price at the time.
Expected internal rate of return (IRR) of around 30% over five years.
2024 Updates and Challenges
Profit Warnings
October 2024: £80 million profit reduction due to higher costs in nine South Division developments.
November 2024: Further profit impact, with adjusted profit before tax for FY24 expected around £300 million.
Root Causes
Independent review identified issues in the South Division:
Poor commercial forecasting
Management capability issues
Non-compliance with processes
Poor divisional culture
Management Response
Comprehensive review across all divisions and business units.
Leadership changes in the South Division.
Enhanced compliance with cost forecasting and reporting processes.
Efforts to improve divisional culture.
Positive Indicators
Year-to-date sales rate significantly higher than the previous year (1.02 vs. 0.72).
Strong performance in on-time delivery, build quality, safety, customer satisfaction, and employee retention.
Why Vistry Remains a Strong Investment Opportunity
1. Isolated and Fixable Issues
Challenges confined to legacy projects in the South Division.
Effective remediation plans in place, with issues expected to be largely resolved by end of next year.
2. Persistent Fundamental Demand
UK's housing shortage provides a long runway for growth.
Government commitment to increasing affordable housing supply aligns with Vistry's model.
3. Validated Partnerships Model
Proven success in other divisions with higher ROCE and stable earnings.
Increasingly recognized as a viable solution to the UK's housing crisis.
4. Robust Financial Position
Expected lower net debt position compared to previous year.
Strong cash generation supported by £4.8 billion forward sales position (up 12% year-on-year).
5. Commitment to Shareholder Returns
Medium-term target of £1 billion capital distribution to shareholders remains.
Ongoing share buyback program demonstrates confidence in long-term prospects.
6. Attractive Valuation
Current market reaction likely led to undervaluation of shares.
Significant upside potential as South Division issues are resolved and transformation progresses.
Conclusion
Vistry Group presents a compelling investment opportunity despite recent challenges. The company's strategic shift to a capital-light partnerships model, addressing the UK's critical affordable housing shortage, positions it uniquely in the market. This transformation, coupled with the company's swift response to isolated operational issues, demonstrates Vistry's resilience and adaptability.
The confidence shown by respected institutional investors and insiders, particularly in light of recent setbacks, underscores the company's long-term potential. Vistry's partnerships model, reminiscent of successful U.S. homebuilders, offers a more stable and capital-efficient approach to homebuilding, aligning well with the UK's persistent housing deficit and supportive government policies.
While recent profit warnings have caused market concern, the company's comprehensive response and the isolated nature of these issues suggest that Vistry is well-positioned to overcome these temporary setbacks. The company's attractive valuation, strong financial position, and commitment to shareholder returns present a potentially lucrative opportunity for investors.
In essence, Vistry Group offers a unique blend of stability through its partnerships-focused model and growth potential in addressing a significant market need. For investors with a long-term perspective, Vistry represents an opportunity to capitalize on the enduring demand for affordable housing in the UK, with the potential for substantial value creation as the company executes its strategic transformation.
Appendix
Norbert Lou VIC Write up on NVR from June 2001 (https://www.valueinvestorsclub.com/idea/NVR_Inc./1871818862)
Description
NVR is a homebuilder. Their operating model, which is unique (and which is described later), allows them to assume the least risk in the industry and produce returns that are the largest.
Homebuilders are generally dismissed because they're cyclical and interest-rate sensitive (really, though, which industry isn't?) and downturns inevitably leave homebuilders holding large inventories of unsold properties -- the unlevered builders then suffer large inventory writedowns while the levered builders go into bankruptcy. However, NVR's model will prevent it from suffering the same fate and, indeed, NVR will prosper in a downturn at the expense of theweaker builders.
Two of the most important facets to its operating model are:
(1) NVR acquires control of land inventory through options contracts. These contracts give NVR the right to buy finished lots from developers. NVR secures a supply of land for its homebuilding operations through the use of these options whereas other homebuilders purchase land outright and engage in land development. By avoiding that speculative practice of land purchase/development, and instead using options, NVR is able to control large blocks of land (years' worth) in its markets while employing less capital to do so. The lower capital requirements of this method translate into lower inventory risk and greater returns on capital.
(2) NVR pre-sells nearly all of its homes. Other homebuilders typically participate in some speculative construction. NVR does not. Before NVR begins construction, an order must be placed and a deposit made. This practice reduces risk and working capital requirements, which further enhance returns on capital.
In addition to NVR's superior model, consider the following:
-- Low valuation: NVR trades at a P/E of 8.6x trailing (7.1x 2001E EPS) and a TEV / EBITDA of 4.7x (trailing). TEV / (EBITDA - Capex) is 4.8x (trailing). TEV / FCF is 7.8x (trailing). I am defining FCF as Net income plus D&A minus Capex.
-- Backlog: NVR has a backlog of 5,765 ordered homes. These homes represent $1.49 billion of revenue. To put this into perspective, this is nearly three fiscal quarters of revenue. In addition, the homes in backlog carry higher gross margins than the ones in the historical results. All of this should translate into higher EPS. (Management says 2001 EPS should be just under $20 per share. In the short history that the company has provided guidance (previously they refused to) they have consistently been ridiculously conservative. Their 1Q results and the backlog indicate to me that the $20 EPS estimate continues to be the case).
-- High ROIC: The low capex nature of its business ($301 mil LTM homebuilding EBITDA versus consolidated LTM Capex of $5 mil) and the low working capital requirements of its model allow NVR to produce superior returns on invested capital: 45.3% in 2000, and 5-year average ROIC of 25%. Bonus fact: In 2000, NVR sold $325 mil more homes than it did in 1999, yet inventory (the bulk of a homebuilder's working capital requirement) increased only $11 million.
-- Intelligent allocation of excess capital: High returns on capital and excess cash flows are only useful if you have a management that is smart about deploying it. In NVR's case, management has chosen thus far to deploy that capital to buy back its own stock. Between 12/31/93 and 12/31/00 the company reacquired 13.5 mil shares. In the first quarter of 2001, NVR purchased another 0.85 mil shares For perspective, there are only 8.1 mil primary shares out today (I'm using primary shares to illustrate this but I use diluted shares for enterprise value calculations).
-- Homes a basic necessity: People will always need homes to live in. The process of building a home has not changed materially in decades. Neither of these statements is likely to change in the next year, the next 5 years, or even the next 20 years. There is minimal technological or obsolescence risk.
-- Dominant in its markets: NVR competes in 18 geographic markets. It is the #1 player in 10 of them. As for the remaining 8, it is usually #2 or #3 (always at least in the top 5). The rest are markets that NVR has just recently entered and will dominate with time.
-- Tax factors: The industry has indirectly enjoyed the benefits of a government subsidy in the form of tax deductible mortgage interest. Additionally, in the last few years, homebuyers no longer have to pay tax on the first $500k of capital gains on a home. This lowers the effective purchase price of a home for a consumer, increases the relative attractiveness of a home as an investment, and adds a little boost to demand for NVR's product.
NVR's profits and market dominance are all the more amazing when you remember that the results have been achieved without land development. NVR has margins better than its competitors despite the fact that other homebuilders benefit from the gross margin boost of speculative development in an inflationary environment.
Catalyst
The small number of shares outstanding occasionally creates large downward gaps. NVR's recent 25% drop is one such opportunity.
Also, share repurchases will continue to drive the stock. It's hard to overemphasize the magnitude of the repurchases or the wonderful track record of buybacks:
12/31/95: 15.21 (millions of shares outstanding)
12/31/96: 13.57
12/31/97: 11.09
12/31/98: 10.39
12/31/99: 9.17
12/31/00: 8.86
04/18/01: 8.14
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Any views on the recent Times article on Vistry?
https://www.thetimes.com/business-money/companies/article/vistrys-greg-fitzgerald-faces-questions-over-conflict-of-interest-j8mblfvrb