Whether the sharp subsidence in Vistry Group PLC (LSE:VTY) shares today is sustained depends on whether its warnings about cost overruns are due to wider problems with the housebuilder's business model or are just an isolated incident.
The FTSE 100 group saw its shares plunge by a third this morning after it issued a major profit warning, detailing how the "total full-life cost projections" to build nine housing developments in its South division had been "understated", which is expected to reduce profit before tax by £80 million this year and £30 million in 2025.
Management's confidence was stated that the problem is confined to the South division, where changes to the management team "are underway", while also an emphasis that this was nine sites out of the group's total of around 300.
It was unfortunate timing for the company and investors, suggested Stifel analyst Charlie Campbell, with the shares having doubled since the start of 2023 as the benefits of Vistry's strategic pivot to a capital-light partnership model started to emerge.
"Having persuaded a sceptical audience that it was managing the transition from mainstream to partnership housebuilder, and outperformed the sector by over 30% in the last twelve months (+27% for UK housebuilders), Vistry now has the challenge of resetting credibility which it will achieve if the cost overruns are proven to be limited to these nine sites," Campbell said.
The key issue, said Investec analyst Aynsley Lammin, "is whether these are isolated and ‘one-off’ in nature, with the worry being that they are more systemic and reflective of inherent risk within the group’s partnership model that could recur in the future".
On the plus side, Campbell noted that as the problem sites are unusually large, possibly London high-rises, they are "perhaps not representative".
Also, management remains confident of its medium-term targets of £800 million in operating profit and £1 billion of capital returns, he added.
After winning most sceptics over, Campbell said today's setback "is likely to dent confidence in the transformation, which could eventually be restored if the market becomes convinced that the problem set out today is confined to those nine developments and does not deteriorate".