Analysts appear to believe that the problem that Vistry admitted to yesterday might not be quite as localised as the board make out.
And there are even hints that chairman and chief executive Greg Fitzgerald may face pressure to conform with City codes and pick just one job for himself.
We reported yesterday that Vistry had issued an unscheduled trading update revealing that its profits would take a £115m hit over the next three years because nine development sites in the south of England had been mis-costed.
No explanation was given of why the costs were wrong, although there has been reported speculation that someone somewhere forgot to factor in inflation – a major factor in Vistry’s new partnership model that agrees what customers will pay before construction starts. Conventional private housing developers, by contrast, can just put prices up on completion if build costs have gone up.
News of the blunder sent Vistry’s share price down 35% from 1273 pence to 829.5 pence. It rallied to 963.5 pence by the end of the day, a 25% fall from the previous day, knocking about £1bn off the value of the company.
According to the Financial Times, the issue has exposed ‘faultlines’ in Vistry’s partnership model.
City analysts appear to agree, to an extent.
Berenberg analyst Harry Goad said: “While Vistry has indicated that the cost issues underpinning its large profit downgrade were a localised issue, we think the profit warning nevertheless raises some questions more generally about its partnership business model, and particularly the midterm margin outlook. Specifically, while the cost issue was presented as something of a one-off event, we think it is useful to consider what the (hypothetical) outcome would have been if these costs had been accurately reflected through the development budgets at the appropriate time; the result would have simply been slightly lower than expected profit margins over 2024-26. This would not have been a disastrous outcome but it would have raised questions among investors about the chances of the group achieving its midterm target of a 12%+ operating profit margin.
“Secondly, we think this issue raises a traditional industry concern about the risks faced by any house-builder that is growing volumes at pace given the associated challenge of achieving acceptable and well-balanced outcomes across matters such as build quality, customer service and profitability. We certainly do not think that this profit warning challenges the fundamentals of the partnership business model, but it does serve to raise questions, in our view, about what is an achievable and sustainable midterm profit margin, which in turn also has an impact on ROCE [return on capital employed] outcomes.”
