Vistry share price rallies after Countryside Partnerships acquisition

UK housebuilding stocks have struggled in recent weeks amid falling property prices and rising construction costs. However, Vistry received a boost earlier this month when it announced plans to buy struggling rival Countryside Partnerships.

Despite ongoing headwinds in the UK property market, Vistry [VTY.L] has strengthened its position with plans to acquire competitor Countryside Partnerships [CSP.L] for £1.25bn. The deal, which was announced on 5 September and will make Vistry the UK’s third largest housebuilder, was encouraged by Countryside shareholders, who have been frustrated by the lack of growth in recent years. The Vistry share price rallied 7.4% the day after the news.

The purchase is part of Vistry’s attempt to turn around a poor performance for the company’s shares, which have fallen 32.1% year-to-date as of 13 September. UK housebuilding stocks have struggled this year as investors become concerned that rising inflation and increased mortgage rates will weigh down national house prices. The government has also added pressure with plans to enact new and costly safety measures.

The Countryside Partnerships share price has risen 9.5% since the announcement was made. When the deal is complete, current shareholders can expect to receive 0.255p of a new Vistry share and 60p in cash for every share that they already hold in Countryside. Despite the recent boost to the share price, it is still down 44.5% since the start of the year as of 13 September. The company was forced to issue a profit warning in January, which prompted the resignation of its CEO, Iain McPherson.

Vistry CEO confident of Countryside synergy

The Vistry share price has jumped 4% since the deal was announced to close at 770.5p on 13 September, reaching as high as 820.5p on 8 September.

The company is hopeful that the acquisition will enhance its existing business. Vistry CEO Greg Fitzgerald estimates that the combination of the two housebuilders will result in £50m in annual cost savings two years after the deal completes. The savings would likely be the result of increased efficiency after consolidating redundancies in the operations of both businesses.

Countryside works alongside housing associations to develop projects across the country with a major focus on affordable housing. Fitzgerald noted that combining this with Vistry’s business offerings will provide “much needed affordable housing across England and material benefits for shareholders”.

The new group will be split into two divisions: a partnerships business, which will continue to focus effort on affordable housing, and a housebuilding division, which will build and sell houses on the open market. If the resulting entity remains undervalued by 2025, there is the possibility that the partnerships division could run itself independently.

Half-year results hit by cladding costs

In its half-year report on 8 September, Vistry announced that it had completed building 3,219 houses in the first six months of the year, up 3% from 3,126 completions in the first half of 2021. The group also reported a 13.1% increase in adjusted gross profit to £280.5m, up from £248m a year earlier.

However, the company’s pre-tax profits fell 28.7% from £156.2m in H1 2021 to £111.3m, in part due to an additional fire safety cost that hit UK housebuilders last April. The new fire safety provision on tall buildings cost Vistry £71.4m. As a result, profit before tax fell nearly 29% to £111m. It is uncertain whether UK housebuilders will have to set more cash aside to deal with cladding concerns in the event that new government regulations are introduced.

Analysts positive despite house price concerns

Despite the rise in cladding costs, Vistry showed a strong performance in the first half of the year. There is a possibility that downbeat house price forecasts could impact profits over the coming months, as higher inflation continues to take its toll on all areas of the economy. However, Vistry’s recent acquisition is a positive step that could help it offset the challenges of a poorer macroeconomic environment.

As a result, analysts are generally optimistic on their outlook for Vistry shares. Out of 13 analysts polled by the Financial Times, five gave the shares a ‘buy’ rating, seven believe the shares will ‘outperform’ and the remaining five rated the stock a ‘hold’.

Out of the 10 analysts offering 12-month price targets, the median was 1,276.5p, which would represent a 65.7% upside on the 13 September closing price.