Vistry Offers The Highest Upside Of The Beaten Down UK Homebuilders

Good day fellow investors. My job is to look for value investment opportunities wherever those might be. And one opportunity is a stock that's 80% down great price to book value was very profitable last year a year before in history which is Vistry Group UK home builder. This was actually a stock suggestion on my stock suggestions page on my research platform. Great community there. So, let's dig into the situations there. UK residential builder partnership, affordable housing and private house building. Revenues are there, earnings okay, net income was good. Now they expect minus30 million in first 6 months losses for this fiscal year. But okay, tangible enterprise value 2.2 billion. The market cap is not at 2 billion anymore is much much lower. Normal P ratio could be around even lower than that. Price to book even lower now as this was a suggestion a while ago. Then the discussion went on cycle earnings per share potential reverts. We are talking about one pound. The stock is now 2.5 pounds. So that's an implied fair value potentially offering 3 to5x no problem. If everything reverts what are the risks? Structural margin impairment less private houses more affordable lower margins. Then there is the credit on the land book the value there the payments the cash flows execution risk post some acquisitions they have suspended the buyback what is the market missing over extrapolation of short-term margin compression or the market is right and it is a structural issue in the housing market but this is not a compounder it's a cyclical asset play with potential oper optional rating a special situation book value holds earning stabilize moderate mean reversion. There was some comment there was some more comments but let's dig into the business and to see whether we can enjoy the seventh time in the last 20 years that this stock offers 3x or more. That's housing. They have a business where they pre-sell a minimum of 50% of their partnership to local authorities with affordable housing. They are the largest affordable house builder in the UK. One out of seven homes. I think now there is a new big stimulus plan for affordable homes for housing in the UK. They should benefit from that over the next 10 years. Let's look a little bit at the numbers. We have the last presentation for the annual 2025 numbers. Next presentation will be in about 10 days where we have the first half of 2026 numbers which will be very interesting. But I just started to see okay what's the business's potential there over time. This is what they did in the past. Great return on capital employed, great profits, profit before tax, 200 million, 100 million. When you compare that to the current market cap of 859 million, that's a P ratio four, not even six. That is the potential. What's going on? They have open market, higher average selling prices and the affordable homes which is the bulk of the business. Building costs have increased a little bit. That's standard inflation but earnings have still been there especially in 2025. There have been some land activity. They have significant number of plots to build new homes. If you look at the cash flows, they did some share buybacks, had to spend some money on building safety, things like that, restructuring taxes. But on the current, let's say, market cap, that's 10% free cash flow in buybacks. If they go back to that, maybe the stock will get revalued to P ratio of 10. That's already a double. If you look at the net assets, they have a lot of partnerships, joint ventures. So it's not that straightforward but we have a lot of assets. They have cut the buybacks recently. When things return to good numbers the buybacks might be restored. So this would be a vistry plan that they are building adding housing big time. Finance costs they are there. So there is significant leverage almost 100 million depending on the ups and downs. This is very important land creditor payment profiles. So they lock the land but they promise the land owners payments in stages and you can see here that they need a lot of cash flows to pay for that land. That's a billion pounds in total and those are obligations to pay if the market is slower. If they can't sell their houses fast enough to pay for that1 billion pounds net present value that with the discounts and interest rates even more that's something that can plague the company for a long time and that has already happened. We have a new CEO from recently and the goal is to reposition the company to operate with significant less leverage. They are selling their slowmoving assets. So treating 2026 as a transition year. Wherever you hear transition in a business analysis, you know it's looking ugly. So they are doing pricing actions discounts on slower moving stock. So if you're buying a luxury home in Vista, you can get a big discount. Think about that. It is a challenging period for the industry for sure. Then they have cash generation actions. but also impairments. However, all nice. The key is this. The interest rates in the UK went from very low to significant. So, if you want to take a mortgage, you can have six 7% per year fixed for the first five and then who knows maybe 10 going forward. At current home prices, it's not a bargain. So mortgage rates higher, less demand for private homes, less investing, less this, lower margins. In this environment, it is a different business. So they have reduced the unsold figure, but they have taken losses on those sales lower than inventory prices. So they expect to have a 30 million loss in the first half. If it will be minus40, the stock will go lower. If it's minus 20, the stock will go higher. Plus, we have the new CEO doing a big review and will be discussed at next earnings 24 September. That will be a key day. When it comes to homebuilders, land requires capital. Capital pays interest. Building requires credit. Credit needs to be available and costs. Profits then depend on markets. Sluggish demand prices your margins. interest rates up is never a good thing. And when it turns ugly, it turns very ugly and it goes fast. They started to have issues. The insurers are guaranteeing less of their commitments from their supplier. So when they want to order something and say we will pay you, the insurer companies are not guaranteeing 100% but just 70%. Now, so everybody retracts from that market like the great financial crisis. Everybody gets away. Everybody disappears and you have big trouble. We have new CEO also the CFO exiting. The CFO is getting a new job. The CEO just said this. He's done 45 years 62 in June. He wants to enjoy his life a little bit. Nevertheless, we can expect a loss of 30 million and then the business review. If there is more kitchen sinking, it might look uglier. And history is the worst performer of them all. However, let's discuss the financial statements to see a little bit what's going on. Everything looks great. Profits, margins, good, good, good. But then now suddenly after good years, we have one bad year. And then earnings from 40 p are now will be likely negative. That changes everything. If we look at the statement of financial position, there is always the group with the joint ventures and the Vistry group adjusted numbers. Still a lot of assets there, a lot of equity especially for Vistry. There is significant goodwill on the acquisition. So that has to be adjusted. The investments are here. So this has to be a little bit lower but tangible is what you're looking for and that is still even if you lower it by a billion it's still double the market capitalization looking a little bit at cash flows it looked good in the previous years they have executed huge repurchases this was in 2024 where was the stock price in 2024 5x so this is always with buybacks everybody's saying sen buybacks buyback shareholder yield. If you do it at an exuberant price and then the stock is 80% down, all that buybacks have just benefited those who were selling. Nevertheless, something very important is to understand 2022 they make an acquisition of countryside planned here. So when they were feeling strong, then they made another acquisition in 2020, Galifford. So a lot of equity issuance it worked and now as the market turned everything looks much uglier. They used equity to pay also in addition to some cash. So with home builders when the market is ugly you try to survive. There is no sustainable long-term cash flows. It can get uglier. It can get better. We have to wait for September result. The hope is for 120 million profit per year. Everything adjusts P ratio 15. Let's say 1.8 billion market capitalization. So with that, you make double your money, perhaps even more if there is a revival in the UK home environment. However, if I look at the last 30 something years, there have been ups, there have been bigs downs in the business, stable, struggling situations, acquisition, acquisition, profits going higher, everything look great. But now have already two years of down and now we'll have the first loss after 2009. So that's something given the delusion earnings look something but they have not been growing after the acquisitions shareholders were used to hire and then you can have one loss year but if we look at the environment these are the interest rates positive positive now this will be heavy this is the key factor 10-year yields the next steps when it comes to investing and what I will do is peer analysis the partnership model analysis. Will this deliver high returns on invested capital over time or it is just simply too levered with the land bank and everything? Next results will help for now it can go anywhere. As a value investor, what I want to see is stabilizing at a lower level. Okay, this is then value. I know the business will survive as is. give me some kind of return perhaps not now but two three years down the road and then I can perhaps buy with a margin of safety knowing that I have a lot of upside and minimal downside for that I would need stability for next two earnings reports and then they say hope of upside 2028 then I buy more in 2027 so this will be followed. We will update 24th September on the earnings and that's something interesting. In the meantime, I'm looking forward to your comments to see what I might have missed, where are the weaknesses, your experiences with home builders, and then we stack up knowledge to lower risk and increase returns. Thanks for watching and I'll see you in the next