Questor: we’ve struck lucky with one builder so let’s put some money into another

It was Napoleon who said he preferred lucky generals to able ones and this column can only accept gratefully the good fortune it had when it assessed Crest Nicholson, the housebuilder, on the very day that it released a promising trading update.

The FTSE 250 firm noted how forward sales had continued to build and profits had exceeded expectations. As a result it declared its intention to return to the dividend list in 2021.

While the timing may have been fortuitous, the statement did at least back up our thesis that the lowly valuation, especially on a price-to-book basis, meant it might not take much by way of good news to get the shares motoring.

As a result, we are going to push our luck a little and look at another FTSE 250 housebuilder, Vistry, which has its own update scheduled for Thursday. In many ways the investment case resembles the one for Crest Nicholson: lots of gloom means the shares look cheap at a time when the Government seems determined to support demand for houses almost come what may.

Vistry’s £1.6bn market value compares with net shareholders’ funds on the balance sheet of £2.1bn as of June. This means the stock trades at a 24pc discount to net asset value. There are three possible reasons.

The first is the prevailing caution over the macroeconomic outlook. Second, Vistry’s profit margins, like Crest Nicholson’s, have lagged those of the peer group. This dates back to late 2016 and early 2017 when the company (then known as Bovis) sold substandard, shoddily made dwellings to some customers.

That helped to cost David Ritchie, the boss at the time, his job and persuaded his ultimate replacement, Greg Fitzgerald, to slow the pace of building and focus on product quality and customer redress instead. That has weighed on margins.

Finally, unlike Crest Nicholson, Vistry has just made an acquisition. The deal to buy Linden Homes from Galliford Try, where Mr Fitzgerald had previously worked, brings additional complexity in the form of integration risk and also leaves Vistry with net debt.

This combination of macroeconomic gloom, operational and reputational missteps and an acquisition will deter many investors from getting involved.

However, the second lockdown in England and signs of renewed weakness in consumer sentiment and “leading” indicators such as purchasing managers’ indices are hardly news. In addition, borrowings are not excessive: the gearing, or net debt to equity ratio, is barely 18pc.

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We must also return to the valuation, which seems already to reflect a lot of these concerns. A forecast price-to-earnings ratio of about 15 for the year just about to end and half that for 2021 looks tempting, while the yield could prove appealing too in 2021 if analysts’ consensus forecasts of a payment of 27.6p a share are anywhere near the mark.

A double-dip recession, prolonged lockdown or multiple waves of the pandemic could all leave such forecasts looking optimistic. But the valuation offers sufficient protection and the imbalance between demand and supply in the housing market is large enough for the stock to be worth the risk.

It may be prudent to wait for Thursday’s trading update but there appears to be some value on offer at Vistry.

Questor says: buy

Ticker: VTY

Share price at close: 710.5p

Update: Contour Global

Last month’s trading update from Contour Global offered plenty of reassurance, especially for income seekers who are still having to duck and dive in their quest for dividends: by this column’s reckoning, London‑listed firms have suspended, deferred, cut or cancelled payments worth nearly £47bn so far in 2020.

Contour Global, which owns and operates power generation assets across the world, confirmed that the third-quarter dividend would be just over four US cents a share. This is in line with its commitment to a 10pc rise in the annual payment and enough to sustain consensus forecasts of a yield of more than 6pc.

The stock remains a good option for income seekers.

Questor says: hold

Ticker: GLO

Share price at close: 193.8p

Russ Mould is investment director at AJ Bell, the stockbroker

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