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In general, I’m staying away from UK housebuilders at the moment. But I’m starting to wonder whether I should make an exception for FTSE 250 company Vistry (LSE:VTY).
The company had some big problems that are all of its own making recently. If those are in the past though, the current share price could represent an outstanding buying opportunity.
Risks
There are obvious reasons to be interested in the UK housebuilding sector at the moment. A long-term imbalance between supply and demand means prices should remain resilient over time.
Adding to this is a short-term focus on building from the government – reiterated in the Spring Statement – makes an attractive combination for investors. But there are some important risks.
One is that Vistry (along with other UK builders) is being investigated by the Competition and Markets Authority for collusion. That’s a big issue and it’s why I’ve been avoiding the industry.
It’s almost impossible to know what the outcome will be and that’s a problem. But at the right price, the risk could be worth it – and the stock has fallen a long way from its 52-week highs.
Time for a turnaround?
Vistry’s big problem recently has been cost irregularities in its South Division. These resulted in a big hit to the firm’s financial performance, with pre-tax profits down 35% in 2024.
The company has conducted a thorough review of all of its divisions as a result and it hasn’t found any further irregularities. And if the problem’s solved, the stock could be a bargain.
Before the issues, Vistry had committed to returning £1bn to investors over the next three years. That’s more than 50% of the company’s current market value. I can’t think of another stock that I’m expecting this kind of return from over that timeframe. And over the longer term, the firm’s differentiated business model looks attractive.
Differentiation
Unlike other builders, a lot of Vistry’s projects are ‘Partner Funded’. This means the costs are shared by organisations like housing associations and local authorities.
There are three main benefits to this. The first is it reduces the firm’s reliance on selling via the open market, reducing the risk of higher interest rates weighing on mortgage affordability.
The second is it that it allows Vistry to undertake more projects using less of its own capital. This makes it less dependent on debt and allows it to return more cash to shareholders.
The third is it means the company should be well-positioned to benefit from government initiatives to boost affordable houses. Increased investment in this area should mean partners have more funds available.
Risks and rewards
Vistry’s approach of using its expertise to generate returns (rather than its balance sheet) is an attractive business model for the long term. And I think investors should certainly take a look at the stock.
There’s a big risk that can’t be ignored, but a potential 50% return over the next three years might be enough to justify buying it at today’s prices. I’m very much undecided in my own portfolio.
So far, that uncertainty has been enough to keep me on the sidelines. But I’ll be watching closely for updates on the investigation and positive news in this regard could well be my cue to start buying.
