Member Info for BeenInTheSector

And long may staying up late for the football continue.

On the preference for commercial people over finance, at a divisional level I completely agree, very few former FD’s have made good MD’s, and commercial would have the edge. CEO level though is very different. Objectively Messrs Thomas and Finch have done well, and would be the equal at least of Mr Honeyman at Bellway, the Commercial man. The point was though, at the CEO level, background is far less important. I’m not an accountant btw!.

On the debt, the 180m guidance is ONLY bank debt. Land Creditors are not included, they are on top of this and are simply mortgages with fixed repayment dates. The building safety costs are not debt of course, but are liabilities to be funded. Therefore quasi debt. None of this is ‘inside knowledge’, as has been mentioned already it is all out there. Emily Bidulph at Barclays reckoned this all added up to £2BN. But the point is that the 180m number is only a part of the debt/liabilities that have to be funded, and anyway will only be 180m ‘for a day’, and then the real number rebuilds. WIP reduction helps massively with cash generation as has been pointed out. Reducing unnecessary WIP is the holy grail as it’s a permanent gain. The ‘fire sale’ of private sales stock is part of this, but the discount does impact quantum of cash recovered, and if too steep can lead to an interest cover covenant breach. However, you can save on WIP generally in the short term but then have to start reinvesting in order to start new sites and build out the bulk deals that have been signed up. These sales to investors generate up-front payments which helps massively on day one, and then if the funding in on stage payments the cash can be managed, but ‘on the drip’ deals, are much lower margin compared to ‘cash on the keys’ deals. These, which are the ‘norm’ require a big WIP investment before they become cash positive. VTY can reduce debt overall, but its a long way off being the ‘capital light’ model promised just yet.

The shorts may not win. I’m not a fan of these guys, but all I’m saying is that they win more often than they lose, otherwise they wouldn’t exist.

It’ll be interesting to see if Adam takes a balance sheet hit and writes off a chunk of value, which will benefit the P&L down the line. It only works if it is taken as an exceptional of course.

I am a new member of this chat forum, and have no ‘skin in the game’ with VTY, but do hold others in the sector (good and bad). As someone who worked in the sector for decades, I follow the comments here with interest. A lot of people who comment are more experienced and knowledgable investors than I am, but I find some of the posts lack subject matter information, and I will try to provide some.

I’ll start with the RickEngland post at the back end of last week mentioning that Adam was a QS by background, and painting this in a positive light. Greg was of course a QS/ Commercial guy too (the ex tea-boy thing was always ‘hammed up). So no change there. Across the industry leaders, there are multiple backgrounds, David Thomas at Barratt was an Accountant, as was Pete Redfern formerly at TW. Jenny Daly was Land, Graham Prothero Gleeson was also Finance, Jason Honeyman at Bellway a QS. Dean Finch at Persimmon again an Accountant. There is no obvious correlation between particular backgrounds, and success or failure.

The ‘shorting’ of the stock is a major theme in the posts, so I’ll address this and explain what I think is happening. Obviously the ‘shorts’ exist in the financial ECO system so they must win more often than lose, so to simply dismiss them as ‘ignorant’ or ‘foolish’ as some here do is a mistake. The bet they are making is that a highly discounted equity raise must come at some point in this cycle at VTY. They think this not because they are concentrating on ‘year end’ cash/debt, as this is almost irrelevant, but the overall debt quantum, including ‘peak’ debt, which is never disclosed, only average debt. At year end (and HY) ever penny of revenue is harvested, by hook or by crook, and no-body gets paid either. Everyone does this, but a month or two later its all back up again. And if the position is ‘managed’ twice a year, you’ll understand that peak debt will be higher than average. On debt though, what cannot be ignored are the other liabilities that will eventually call on cash. Notably for VTY, Land Creditors and Building Safety costs, all of which will come due. They might be delayed but thats all. Then there are the obligations under the JV’s to put in minimum levels of cash reserves. So, the total debt (and I think that Barclays summarised it better than I can), is more like £2BN. That isn’t going away anytime soon. It might be ‘managed’, but it will be difficult to drive down significantly without strong profitability. There are temporary levers such as a slow down in land purchase, and WIP investment, but eventually this has to reverse in order to remain scalable and support future profitability. Secondly, there is the interest cover covenant. There is a risk to this too, which will be on the minds of the ‘shorts’. There is no inevitability that these guys are right, but they are betting the odds that they are. Frankly, VTY (and others), are one more external shock away from a real problem.