Vistry Group (VTY.L)

If you have feedback/questions/comments on this pitch, please email [email protected] or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.

Vistry Group PLC is a leading UK homebuilder that is in the process of transitioning to an asset-light, high-return "partnerships" business model. The company is pivoting away from traditional homebuilding to focus on partnerships with local housing authorities and other organizations to develop affordable and mixed-tenure housing. This shift positions Vistry to benefit from increased government focus on expanding affordable housing stock while dramatically improving returns and reducing cyclicality.

Key Points:

• Transitioning to asset-light partnerships model with 60-70% of homes presold, reducing volatility and capital requirements

• Partnerships business generates 2-3x higher cash-on-cash returns compared to traditional homebuilding

• Exiting traditional homebuilding segment expected to release £1.3B in cash over next 2-3 years, with £1B earmarked for share buybacks

• Medium-term targets of 40%+ ROCE and £800M EBIT by 2025, implying forward P/E of <4x

• New Labour government committed to expanding affordable housing, creating tailwinds for Vistry's partnerships model

• Potential for significant multiple re-rating as market recognizes transformed business model

Financials:

• H1 2024 revenue of £1.97B, up 11% YoY

• H1 2024 adjusted operating profit of £227.3M, up 10% YoY

• H1 2024 adjusted operating margin of 11.5%

• Forward order book of £5.1B, up 19% YoY

• Net debt of £322M as of June 30, 2024

Valuation:

• Current share price: £13.27

• Market cap: £4.4B

• EV/EBITDA (LTM): 10.4x

• P/E (LTM): 18.3x

• P/B: 1.36x

Risks:

• Execution risk in transitioning to partnerships model

• Potential delays in government funding/programs for affordable housing

• Macroeconomic headwinds impacting UK housing market

• Competition from other homebuilders in partnerships segment

Catalysts:

• Continued progress in exiting traditional homebuilding segment

• Demonstration of higher returns and cash generation from partnerships model

• Increased government support and funding for affordable housing initiatives

• Significant share buybacks reducing share count

Vistry is in the midst of a transformational shift to a highly attractive business model, but the market has yet to fully appreciate the implications. The partnerships model offers dramatically improved returns, reduced cyclicality, and strong growth potential given government priorities around affordable housing. As Vistry completes its transition and demonstrates the earnings power of the partnerships business, we believe the stock could see substantial multiple expansion from current levels. With significant buybacks on the horizon and medium-term earnings targets implying a forward P/E of <4x, Vistry offers compelling upside potential with a margin of safety.

If you have feedback/questions/comments on this pitch, please email [email protected] or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.