Vistry’s shares are no higher than in 2015 but the company is very different

On every measure the housebuilder looks cheap. The only problem is that it may take time for the market to do anything about it. By Russ Mould

Abid for Countryside Partnerships from a Us-based private equity firm appears to back up nicely last week’s argument in connection with Lloyds Banking Group that lowly rated stocks with asset backing and a sound balance sheet could offer the optimal balance between protection from falls and the potential for gains. More specifically, it also suggests that we may be right to hang on to our housebuilders, in the form of Springfield Properties, Crest Nicholson and Vistry.

It has felt for some time like the roof has caved in as far as housebuilding stocks are concerned. Interest and mortgage rates have gone up, the cost of living crisis has squeezed consumers’ pockets and the building industry has had to sign the Government’s Pledge for Developers in the wake of the Grenfell Tower cladding crisis; Vistry, for example, has set aside £68m to cover remediation costs for cladding on buildings more than 11m tall.

As a result, Vistry’s shares stand no higher than they did in 2015, even if the company is very different from seven years ago thanks to the potential of its partnerships business and greater scale, both the result of a deal in 2020 with Galliford Try. Its net cash pile is also larger. Finally, its net asset value per share has grown to £10.78 from 714p at the end of 2015.

Even if some allowance must be made for the goodwill that came with the Galliford Try transaction, Vistry’s shares do not look expensive on an asset basis. Its £1.9bn market value compares with £2bn of inventory and £399m in ready cash – and numbers similar to those at Countryside Partnerships are drawing the attention of a predator.

This again takes investors back to the multiple of book value or net asset value. An old rule of thumb is that builders’ shares look potentially good value when they trade at NAV or less and expensive when they trade at two times NAV or more.

On a stated basis, Vistry trades at barely 0.85 times historic book value. Even if you adjust NAV per share for the £547m of goodwill on the balance sheet, the multiple still comes in at 1.1 times. That is below the 1.3 times at which Countryside was trading before In-cap launched its 295p-a-share bid, which itself equates to 1.7 times historic NAV.

Throw in the 8pc-plus dividend yield, well backed earnings and the cash pile, and Vistry looks cheap. Granted, it is hard to see what catalyst could emerge to crystallise that value, given the current economic backdrop, but there is an old saying that investors can have cheap stocks or good news, just not both at the same time.

If the stock is cheap enough, the business model sound enough and the balance sheet robust enough, there is a chance that good news will appear at some stage and so we will patiently await its arrival.

The foundations of the investment case for Vistry still look solid. Hold.

Update: Shell

Britain’s windfall tax on oil companies such as Shell and BP may offer welcome help for hard-pressed households, but it does not come close to tackling the fundamental issue: a long period of underinvestment in the hydrocarbons on which we still (unfortunately) rely as our primary energy source.

For this we can thank the (entirely understandable) concerns about the environment and the threat of punitive taxation for those who press ahead and drill anyway.

Russia’s invasion of Ukraine is an external complication to an already big self-inflicted problem.

Oil prices are still going up and it makes you wonder what will come next out of the usual running order of emerging-market-style remedies. After windfall taxes it is usually more subsidies for demand, then price controls, quotas on production and then consumption, followed by tariffs, export taxes and ultimately asset nationalisation.

If investors see the Government working its way through this list, there may be trouble ahead, since history suggests that such measures may make the original problem worse, not better. In this case, that could mean higher oil prices.

Questor will therefore stick with Shell. Hold.