- Profit warning earlier in January had already lowered the bar of expectations
- New CEO has task of ending a run of operational missteps
- Macroeconomic outlook still unclear and unhelpful
- Net cash balance sheet remains a source of strength
“Crest Nicholson’s results for the year to October 2023 contained no new, nasty surprises as last week’s profit warning had already lowered expectations, so its share price has hardly flinched in the face of a sharp drop in completions, sales and profits,” says AJ Bell investment director Russ Mould. “A net cash balance sheet should see the builder through the current downturn and, relative to the value of the company’s assets, Crest Nicholson’s shares are the cheapest of any of the big, quoted housebuilders. For the shares to really kick higher, however, investors may want to see interest cuts from the Bank of England and an end to the operational miscues which have dogged the company for several years.
“A trading alert in January had already flagged a 70% drop in underlying pre-tax profit to £41 million from £138 million in the 12 months to October, thanks to a 26% fall in housing completions and input cost inflation. Additional costs relating to a problematic housing project in Surrey, a legal claim relating to another site back in 2021 and a small increase in costs relating to cladding remediation further punctured the stated profit figures.
Source: Company accounts. Fiscal year to October.
“These missteps added to a list of setbacks suffered by the firm, not all of which have been beyond its control. Granted, no-one saw the pandemic and lockdowns coming and higher interest – and mortgage – rates have hit demand at all of the quoted building firms, who have also had to wrestle with increased staff and raw material costs. But Crest Nicholson’s profit margins peaked in 2016 and profits hit a high in 2017, a good year or two before other builders began to feel wider pressures.
Source: Company accounts. Fiscal year to October.
“Peter Truscott arrived as chief executive in 2019 to try and clean house, but his job was made much harder by Covid-19 and lockdowns. His successor, Martyn Clarke, will join from Persimmon with the task of carrying on Mr Truscott’s work.
“A more helpful macroeconomic environment would provide a helpful tailwind, but Crest Nicholson’s shares are clearly cheaper (on the basis of price to book, or net asset, value per share) than all of its quoted peers. This reflects the poor relative profitability and the company’s apparent inability to sometimes get out of its own way.
“Equally, this offers upside potential for Mr Clarke and shareholders if Crest Nicholson can shake off this reputation and ride the next upward leg in the housing cycle, which may get a lift as and when the Bank of England starts to cut interest rates.
“The old rule of thumb has it that builders are generally cheap when they trade on one times book, or net asset, value or less and expensive when they trade near two times or higher.
Source: Company accounts, LSEG Datastream data, Marketscreener, consensus analysts’ forecasts
“In this respect, Crest Nicholson’s shares may be already pricing in a lot of bad news and not much by way of good. The firm has a net cash position and intends to carefully husband this resource in its new financial year, by both slowing its regional expansion and cutting the dividend.
Source: Company accounts. Fiscal year to October.
“Analysts are taking on board management’s strong hint that earnings cover for the shareholder payment will return to something like 2.5 times in the coming year, as they are already forecasting a steep dividend cut for fiscal 2024.”
Source: Company accounts, Marketscreener, consensus analysts' forecasts. Fiscal year to October.
