Housebuilding industry poster-child Vistry has been charting an aggressive growth course despite a tricky market over the last two years. Joey Gardiner asks why it has now lost half its value after two profit warnings in two months
For the past year, it is fair to say that partnerships housebuilder Vistry has been the toast of the housebuilding sector. While others have been reducing their output, Vistry has grown rapidly, saying in September that it had become the UK’s biggest residential developer – with its eyes on delivering 30,000 to 40,000 homes a year in the long term.
Its focus on the vital affordable housing space means that it has also made itself a key part of the government’s 1.5 million homes ambition. No surprise then that its stock market value outperformed other housebuilders this year – by an average of 43% to October – hitting over £4.5bn at peak.
But, on 8 October, events took a turn for the worse. More than £1bn was wiped off the value of the company in a single day following a profit warning related to what it initially said were £115m of “understated” cost projections on its projects. And last Friday, things got even worse, as the business revealed a further £50m profit warning and said it was reviewing growth prospects for the years ahead. The firm’s chief executive Greg Fitzgerald admitted the news was “very unfortunate [and] upsetting”, and the market seemed to agree – Vistry ended the day with shares down nearly 20%, and the company overall worth less than half what it was just two months ago.
However, the firm, which sells most of the homes it builds to housing association, local authority and build to rent clients under “partnership” deals, said on Friday that it continued to believe that the problem is largely related to just one part of the business.
It said an in-depth review of the issue, commissioned in October, had confirmed its expectation that the cost projecting issue was not systemic across the rest of the business. “Critically, we found no systemic issues outside of the South Division,” Fitzgerald said on the analyst call on Friday. “That’s the big takeaway.”
The continuing roster of major project wins announced since the initial October profit warning – such as Bromford, for 700 homes; Hinckley, Leicestershire for 475; and Solihull Council for around 200 – certainly indicates business as usual. However, the Friday update did also point to other issues which could affect future performance, such as newly rising build costs overall, the impact of Labour’s national insurance changes, escalating building safety costs, and a weaker than expected market. Certainly, the scale of the drop in the firm’s value suggests there are many who have their doubts. The profit warning seems to be a vector which has allowed questions about the business’s rapid transformation, its business model and its charismatic CEO and chair to resurface.
A problem in the southern division
Vistry said on 8 October that the “total full-life cost projections” to complete some projects had been understated by around 10% of “total build costs”. It said the £115m problem was limited to just nine schemes – out of more than 300 across the business – and to just its southern division (one of six).
It immediately commissioned an independent review into the issue, conducted by Vistry’s independent non-executive director, and former Laing O’Rourke finance director, Rowan Baker, which reported at the scheduled trading update last Friday.
In broad terms, while this review uncovered an extra £50m of costs, it ultimately endorsed Vistry’s belief that the problem regarding cost projections has not been systemic across the business (see ’What Vistry has said’, below). Speaking to analysts, Fitzgerald, who, according to the Times last Friday, had gone to the board to offer his resignation in the light of the profit warning, said the issues had been confined to jobs in the former housebuilding parts of the business – not jobs running the new “partnerships” model – and all in the southern division, where management was being taken in hand. “Management capability in certain areas has been an issue,” he admitted, “and non-compliance with our processes and a poor divisional culture. [But] That all relates to the South division.
“We are extremely confident that we have now uncovered, in the last five weeks, the full extent of the issues, and there will be no more adjustments.”
They’ve had an issue and they’re dealing with it. There’s a lot of talk out in the market, but how much is just stirred up by competitors with their noses out of joint?
Greg Campbell, partner Campbell Tickell
There is also, to date, no evidence that Vistry has financial problems on further jobs, and there are plenty in the sector happy to accept this account of events. Terry Fuller, former Taylor Wimpey executive and Homes England regional director, says the negative reaction has been overdone. “There has been an increase in overall build costs across the industry. Vistry is not alone here. There might have been some very poor decision-making in a division, but all firms go through this.
“If I’m an investor, I’m asking if the cash flow is still good – and the answer’s ‘yes’. You could actually argue the timing of Vistry’s expansion in terms of the wider market now picking up is great.”
Moreover, while the warning will impact profitability by £105m this year, Vistry has made clear that it is sticking to a series of previously announced financial goals, including a £130m share buyback scheme, £1bn of capital back to shareholders and £800m adjusted profit.
Displaying his confidence in the business, Fitzgerald immediately bought £200,000 of stock after 8 October – presumably in the expectation of a price recovery.
Greg Campbell, partner at consultant Campbell Tickell, which advises housing associations on development deals, speaking after the first profit warning, said he had confidence that the business will stay on track. “The response suggests they’ve had an issue and they’re dealing with it,” he said.
“There’s a lot of talk out in the market, but how much is just stirred up by competitors with their noses put out of joint?”
Another industry figure close to the firm, who declined to be named, agreed. “Vistry is a disruptor. You shouldn’t be surprised if those that are happy with the orthodoxy are lining up to criticise it.”
So, given all this, why the extreme reaction by the City? Initially, after 8 October, investors will have been worried that the profit warning was the beginning, not the end of problems. While the reaction to the review will have offered some reassurance that problems are not systemic, it also flagged a lowering of expectations in the medium term.
What Vistry has said
On 8 October, Vistry issued an unscheduled trading update saying it had “recently” become aware that within its southern division – one of six Vistry divisions – the “total full-life cost projections” to complete nine out of the division’s 46 developments had been “understated by about 10% of the total build costs”.
It said the issue included “some large-scale schemes”, and that its estimated impact on pre-tax profit was £115m.
Friday’s statement endorsed the view that the problems related primarily to one division. However it deepened the firm’s difficulties in key respects. The review found that projections were further out than stated, by up to 12%, not just 10%, that 18 projects were involved, not nine, as previously stated, and that “the pressure being felt from organisational change” was a “fundamental driver” of the problems.
It also found that there were £8m of problems in projects across other divisions and regions in Vistry, with the sum of these issues leading to a revised total hit to profit of £165m – £50m worse than initially expected. The losses are expected to total £105m this year, £50m in 2025 and £10m after that.
As a result of this new information, Vistry on Friday said its estimated pre-tax profit this year will be just £300m, down from the £450m analyst estimate prior to 8 October. It will also miss its 18,000-home volume target for the year by 500 homes, and miss its target to get net cash at the end of the year – both of which it had assured the City on 8 October it was still on track for.
Vistry has a medium-term target of £800m adjusted operating profit, and £1bn of capital distributions to shareholders.
However, it admitted that expectations for future years will now have to be reduced, and, while its targets remain in place, it will “review” the timing of delivery of its growth plan. Chief financial officer Tim Lawlor told analysts Vistry will update on the growth plan in the new year. “We’re taking a more conservative view on growth, given the market conditions and the need to stabilise the South division,” he said.
“We remain committed to those medium-term targets and to be a capital light business […] What we need to do, though, is to review the timeframes in light of what we’ve discovered, to take account of the fact that we’re starting from a lower point.”
The statement said the firm “remains confident in its Partnerships strategy”.
The problem is that, given the financial hit, there is now uncertainty over Vistry’s growth prospects. Gregor Kuglitsch, analyst at UBS, said in a research note that “we suspect focus will shift to balance sheet preservation from here”. After 8 October, Kuglitsch pointed out the size of profit warning illustrated “how material an impact a few sites can have on the overall profit of the group”.
Likewise, Emily Biddulph, housebuilding analyst for Barclays, said in an investor note that Friday’s statement highlighted “ongoing risks” at the firm. “While cost issues being confined to the South may be viewed as reassuring,” she said, “this statement outlines some wider potentially concerning issues, which would make us cautious on assuming this is the final cut to estimates.”
Another analyst, who spoke on condition of anonymity, said that investors will assume there will likely be further bad news before this issue is resolved. They said: “Stock market wisdom is that profit warnings always come in threes. The first one identifies the problem, with the second one it gets worse, and then only the third one really sorts it out.”
Alastair Stewart, analyst at Progressive Research, said this was something the firm’s investors will not tolerate. “‘Three strikes and you’re out’ might be a phrase doing the rounds today,” he said.
Managing transition
Beyond generalised uncertainty, there remain specific questions about all the recent change in the business. The former Bovis Homes business that executive chair Greg Fitzgerald joined in 2017 is still in the process of absorbing two transformative acquisitions – of Galliford Try’s housebuilding and partnership housing businesses, Linden, in 2020, and of partnerships firm Countryside in September 2022.
Fitzgerald just over a year ago switched Vistry to a radical “partnerships-only” business model and has embarked on a pell-mell quest for turnover growth. The firm will this year build more than four times as many homes as it did when Fitzgerald was brought in just seven years ago and if the firm hits its longer term 24,000 homes-per-year target it will be not just the biggest UK housebuilder, it will be the biggest housebuilder in UK history.
>> See also: ‘I’m extremely demanding’ Greg Fitzgerald on delivering the Vistry growth plan
Hence, Charlie Campbell, analyst at investment bank Stifel, said in the wake of 8 October the firm faced a challenge of “resetting credibility” after “having persuaded a sceptical audience that it was managing the transition from mainstream to partnerships housebuilder”.
UBS’s Kuglitsch, meanwhile, said it will “likely question the credibility of the business plan and put into question the ability to execute”.
Discounts
This is particularly the case as the pace of the growth strategy, propelled by the US investors who own 60% of Vistry, might be expected to make some nervous at the best of times. But the past few years have not been the best of times in the UK market.
Following the spike in lending rates that came after the Liz Truss mini-Budget, both the mainstream housing market and the build-to-rent (BTR) market, important to the partnerships model, have been weak, with house sales and investment in BTR both falling last year. More significantly, a cash crunch for housing associations, Vistry’s main customers, caused by rent caps and the need to invest in their existing stock, has seen many rein in development activity.
The concern is around how easy it will have been to manage rapid growth into this kind of market, given how price conscious customers will have been. Vistry has undoubtedly been winning a large volume of work, but Fitzgerald this year admitted to giving “massive discounts” to tempt big customers, albeit he maintained that the business had not altered its margins or hurdle rates for taking on work.
Growing at a very accelerated rate while integrating very sizable businesses – in a market with construction inflation, but that is weak – is a risky thing to do
Anonymous consultant
The big advantage of the “partnerships” model over traditional housebuilding is that firms are not required to tie up lots of capital in land to undertake development, and are not beholden to private sale market absorption rates. However, City analysts say the disadvantages are lower margins and a greater exposure to the risk of construction price inflation.
One consultant working closely within the housebuilding sector says: “The issue is that, if you are doing big deals on a fixed price, you don’t have the release valve to cope with increasing construction costs that you do with private housing.
“With private housing, so often price rises in the sales market are effectively a get out of jail on the construction increases you’re having to absorb. But, with this model, you have all the risk. And, at this point in the cycle, work would have been on relatively thin margins anyway.”
They add that these risks would have been exacerbated by how hard the business was being driven to grow. “Growing at a very accelerated rate while integrating very sizeable businesses – in a market with construction inflation, but that is weak – is a risky thing to do. I certainly didn’t fall off my chair when I heard the news [of profit warnings].”
Unsurprisingly, Fitzgerald doesn’t paint quite the same picture. He told analysts on Friday that fixed price contracts all had a “very healthy contingency”. In addition, he said that while the “pace and purpose” of the business’ growth had clearly affected the management of the southern division, growth itself wasn’t at fault because other divisions hadn’t been affected in the same way. “The other five divisions are dealing with that pace and pressure exceptionally well, and are a little bit dumbfounded as to what’s happened in the South division,” he said.
Chief financial officer Tim Lawlor added that the feedback gained during the review suggested it was the pace of structural and system changes, rather than growth, that staff felt had been putting pressure on.
Any concerns are not helped by the fact that Fitzgerald, in breach of usual City governance standards, is both chair and chief executive of the company – leading one observer to point out that it is not clear who shareholders should turn to for independent scrutiny of the company’s executive. However, four in every five Vistry shareholders voted in favour of Fitzgerald becoming chair when the role was added to his chief executive brief this year, and it will be reviewed next year.
Analysts have also flagged concerns about the way that it reports profit. UBS’s Kuglitsch said in October that Vistry’s accounting methods rely on “estimating costs” and “can lead to uneven profit performance if early estimates on costs are over-optimistic”.
Barclays’ Biddulph said in October the size of that warning relative to the small number of contracts was “a function of the way profits are accounted for”, and is a “fundamental ongoing risk to the Vistry investment case, due to its long-term contract accounting”.
No money tree
Following Friday’s statement, Vistry appears to be putting its underestimate of costs down to the poor judgment of southern division managers under pressure following the post-merger restructure. But there are some who have drawn the link instead with the very public decision to force down supply chain prices just over a year ago. While Fitzgerald on Friday again said subcontractors “overwhelmingly support” its partnerships strategy, some specialist contractors, still upset about Fitzgerald’s decision to impose a unilateral 10% pay cut on subbies, think it is no coincidence that 10% is exactly the margin by which, according to Vistry, costs have been understated on the problem jobs.
Vistry has said the cut in rates was justified by a guaranteed flow of work to its suppliers, with Fitzgerald telling Building earlier this year that “anger had completely gone”.
The supply chain is not a money tree that you can just shake. We said from day one that the 10% wasn’t there
Iain McIlwee, chief executive, Finishes and Interiors Sector
Iain McIlwee, chief executive of trade body the Finishes and Interiors Sector, says they made the point a year ago that the supposed savings Vistry was expecting were just not available. “The supply chain is not a money tree that you can just shake,” he says, adding that with some contractors walking away and others negotiating, the 10% cut will not have been achieved. “We said from day one that the 10% wasn’t there.”
Mike Wharton, a former City analyst who is now chief executive of roofing contractor CRS, publicly walked away from Vistry when it imposed the 10% cut last autumn, telling the firm then that its “short termism may well get your CEO a great bonus approved by happy shareholders, but it does nothing for the future of construction in the UK, and especially nothing for affordable housing”.
Vistry said in January that its strategy had been successful, adding that “working with our key supply chain partners, it agreed cost reductions for all existing and future contracts”.
Coalface
Building asked to speak to Vistry, but the firm did not respond by the time of publication. However, it is clear from its statement that it believes it is now tackling the “poor divisional culture” which has led to the profit warning, with a review of Vistry’s structure designed to remove layers of management and, in Fitzgerald’s words, “get me closer to the coalface”. It is also working harder to mandate group commercial practices, roll out training and support, and change the culture around whistle-blowing – presumably to ensure employees feel safe passing bad news upwards. It feels the problem is on its way to being dealt with.
Given the UK government’s reliance on Vistry to hit its housebuilding numbers, it is not only investors and industry executives who will be watching closely to see if this is really the case.
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