UK Edition
We have made capital gains on housebuilder Vistry, with another 40p per share of dividends in the pot and another 40p per share coming on May 24 after last week’s full-year results, pending approval at the annual meeting.
That is all well and good but the shares are down by 30pc from their summer 2021 peaks so we must stress test our thesis and look at what is worrying the market and could therefore go wrong.
Admittedly, it is not that hard to build a laundry list of potential concerns. The Bank of England has awoken from its slumbers and begun to nudge up interest rates. The stamp duty tax break has come to and end.
The scope of the much-extended Help to Buy scheme has continued to narrow. The cladding tax, of 4pc on any profits above £25m, comes into force on April 1.
Further remediation costs associated with leaseholders’ properties affected by cladding could cost Vistry an extra £30m to £50m on top of the £25m it has already put aside.
There remains the real possibility that consumer confidence ebbs and the economy slows down as soaring oil and gas prices feed into higher fuel and heating costs.
The most serious of these is probably the threat of a slowdown. Any investor who fears a sustained bout of inflation (or even stagflation) may be understandably inclined to flee shares in companies that rely on discretionary consumer spending.
However, demand still seems to be outstripping supply in the housing market and higher prices should result and help to compensate for increased raw material and labour costs. A land bank of nearly 43,000 plots may also provide a little protection from inflation.
Vistry is also seeing increased returns from its partnerships and regeneration work, which resulted from 2020’s deal with Galliford Try. Those additional income streams meant that Vistry’s stated 2021 operating profit comfortably exceeded the pre-pandemic peak.
Partnerships generated sales of £864m at a margin of 9.2pc in 2021 and that performance left the operation on track to meet its 2022 targets of more than £1bn in sales at a margin of more than 10pc. Management’s long-term goals of £1.6bn in revenues at a return of more than 12pc are also still intact.
Best of all, the valuation suggests that a lot of bad news is already factored into the share price. Vistry trades on only seven times forecast earnings, with a predicted yield of 7.5pc for 2022.
That yield is underpinned by a balance sheet that carries net cash and a pension surplus.
The shares are also back trading at below book value, or net asset value, per share. Granted, some caution is required here as £548m of the stated book value of £2.3bn is goodwill relating to the Galliford Try transaction. But even adjusting for that, the stock trades on just 1.2 times historic book value, towards the lower end of the range that analysts use as a rule of thumb for assessing builders’ valuations – at or below book value looks potentially cheap and two times or more potentially expensive.
Vistry still looks good value, especially for income-seekers. Hold.
Questor says: hold
Ticker: VTY
Share price at close: 938.80p
Update: Hunting
Last week’s full-year results from Hunting, the oil equipment and services specialist, were no thing of beauty, as revenues fell and the firm made a loss. However, chief executive Jim Johnson is already talking of an increase in orders in the wake of higher oil and gas prices and the race may soon be on to find fresh supplies of hydrocarbons, despite the long-term drive towards net zero.
Analysts are pencilling in a return to the black in 2022 and 2023 but nothing like a move back to previous peaks when pre-tax earnings exceeded $100m (£76m), so there is potential for big gains if the energy crisis persists.
A balance sheet that has net cash offers protection too and Hunting’s £373m market value means the stock trades below tangible book value of £500m.
This stock could yet prove to be a slick pick. Hold.
Questor says: hold
Ticker: HTG
Share price at close: 263p
Russ Mould is investment director at AJ Bell, the stockbroker
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