Questor: Vistry can cash in on the extended stamp duty holiday and 95pc mortgages

Questor share tip: the housebuilder looks cheap, is expected to raise its divi and housing is about to boom

Russ Mould 9 March 2021 • 5:00am

Buying the obvious rarely leads to strong investment returns and Vistry, the housebuilder, may seem a more obvious selection after last week’s full-year results, which featured a return to the dividend list, showed a marked strengthening of the balance sheet and came with comments from the chief executive, Greg Fitzgerald, about a good start to the new financial year.

However, the shares are still cheap, so the chances of us adding to the 60pc-plus gain achieved since last autumn’s initial analysis remain good.

Even if profits tumbled in 2020, thanks primarily to the second-quarter lockdown in construction activity, Vistry generated cash and ate into the debt taken on to fund its acquisition of Linden Homes from Galliford Try.

Net debt is modest, even when leases and the pension liability are taken into account, and management is confident of further improvement in 2021, helped by a rebound in housing volumes and profit margins. Cost savings are one reason for the margin improvement and house prices could be another.

Demand for houses already outstrips supply and the extension of the stamp duty holiday and the new government mortgage deposit guarantee scheme are likely to fuel house prices further, to the benefit of those builders, including Vistry, that have been shrewdly snapping up land, even if the new deposit scheme applies to all homes up to a value of £600,000 and not just those that are newly built.

The balance sheet and expectation of improved profits underpin Vistry’s goal of gradually reducing earnings cover for the dividend from 2.5 to 1.75 times.

That implies future increases in the dividend and explains why analyst forecasts for dividends put the stock on a yield of 4.4pc for 2021.

Such a yield is appealing, even more so when coupled with a forecast earnings multiple of under nine.

Best of all, Vistry does not trade at its historic book value, since its £2.1bn market value compares with net assets (or shareholders’ funds) of £2.2bn.

Even adjusting for £547m of goodwill, a price-to-book multiple of 1.3 does not look expensive for two reasons.

First, rising profits mean book value should rise over time. Second, the old rule of thumb is that housebuilders are attractively priced at book value or less and begin to be toppy at twice book value or more.

Persistent government intervention in the market means that history is by no means certain to repeat itself this time around, but at least Vistry is trading towards the lower end of that valuation range from the perspective of prospective or current shareholders.

The foundations of the investment case for Vistry appear sound. Hold.

Questor says: Hold

Ticker: VTY

Share price at close: £10.19

Update: Yellow Cake

One beef that this column has with miners, especially the smaller ones, is their tendency to raise capital on a regular basis, either by tapping shareholders for fresh cash, or by diluting down their percentage holding over time, or both.

Such an eventuality seemed unlikely when Yellow Cake was first assessed in August last year, as the firm does not mine or produce uranium but instead stores uranium oxide at its Canadian warehouse.

Nevertheless, last month the firm raised $140m at 223p a share, increasing the share count by around 50pc.

Thankfully, private investors got a chance to participate via the PrimaryBid platform and the strategy behind the fundraising – the chance to buy 3.5 million pounds of oxide from the world’s leading uranium producer, Kazatomprom, at just under $29 a pound.

The purchases raises Yellow Cake’s oxide holdings by 38pc to 12.8 million pounds, with money available to selectively buy more.

Uranium supply is running below demand and utilities are whittling down their stockpiles.

Shares in US-quoted miners such as Cameco, Denison Mines and Energy Fuels are starting to motor and, if a uranium bull market develops, Yellow Cake’s latest purchase could look shrewd: the commodity peaked at more than $140 a pound more than a decade ago.

The long-term investment case seems intact. Hold.

Questor says: Hold

Ticker: YCA

Share price at close: 220p

Russ Mould is investment director at AJ Bell, the stockbroker

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