Investing.com — Shares of UK homebuilder Vistry Group (LON:) dropped more than 14% on Friday after the company cut its 2024 profit guidance by nearly 15%, following an extensive review that flagged issues within its Southern Region house building division.
Vistry now expects profit before tax for the fiscal year to reach £300 million, down from a previous £350 million estimate.
The revised outlook comes as Vistry reported discovering deeper-than-expected operational problems in its Southern Region, revealing structural weaknesses that included poor divisional management, forecasting inaccuracies, and an unsustainable work culture.
These issues, concentrated in five major, multi-phase projects, have created a ripple effect that led Vistry to reduce its projected completions for the year from over 18,000 to approximately 17,500 units.
Most of the challenges are tied to Vistry’s housebuilding operations rather than its partnership sites, though recent softness in the partnership market further contributed to the guidance cut, with volumes tapering off in September and October.
Vistry said that while there were no systemic issues found outside the Southern Region, the organization’s shift toward a partnership-focused business model appears to have compounded pressures across the board.
The impact of the company’s operational issues will extend beyond this fiscal year, with a projected £25 million hit in 2024, followed by £20 million in 2025, and a remaining £5 million in 2026.
The total estimated cost of addressing these issues now stands at £165 million, largely driven by unanticipated full-life costs on those Southern Region projects.
The company also issued cautious updates on its capital and cost expectations. While it had aimed to achieve a net cash position by year-end, it now anticipates net debt to be below last year’s £88.8 million, but well short of reaching positive net cash.
Furthermore, while Vistry has reiterated its intention to return £1 billion to shareholders, it has hinted at a possible delay in the previously projected three-year timeline, given the current operational setbacks.
The ongoing £130 million share buyback remains on track to be completed by Vistry’s annual meeting in May, but the longer-term capital returns strategy will be under review.
Looking at building safety provisions, Vistry is conducting a fresh review to assess potential added liabilities related to new building safety regulations, including the impact of second staircase requirements on some projects.
Although this review is not expected to materially impact cash flow, the additional building safety considerations represent another headwind for the group in the coming months.
In terms of recent market activity, the group reported a 42% increase in weekly sales rates year-to-date, with consumer demand showing some resilience, though tempered by ongoing mortgage affordability challenges.
The open market has seen increased buyer incentives, with Vistry offering up to 5% of home prices in incentives to spur sales.
However, demand from Registered Providers has been patchy, with strength in the Midlands and North but subdued interest in London and the South East.
On the cost front, Vistry is forecasting modest pressure on build costs for 2025. The recent Budget’s increase in National Insurance contributions will impact the company’s bottom line by about £5 million, adding further pressure as it navigates a challenging operational landscape.