“If anyone thinks the UK’s stock market is unloved and undeservedly undervalued then house builders may be one way to get exposure in anticipation of any improvement in the FTSE indices’ fortunes – or at least that’s one message that can be taken from Crest Nicholson’s trading update today,” says Russ Mould, AJ Bell Investment Director. “Forward sales are still building nicely, the balance sheet is net cash, profits are exceeding expectations and the FTSE 250 firm even intends to restore dividend payments in 2021.
“The shares are responding with a big gain and this shows what can happen if sentiment changes quickly and an unloved stock provides even the slightest scrap of good news.
“Granted, the company has had a patchy recent history, churning out more than one disappointing profit update in 2018 and 2019 as its high-end, Southern England business mix meant a lot of its properties were ineligible for the Help-to-Buy scheme. In addition, the Surrey-headquartered company’s operating margins had begun to lag those of the peer group by several percentage points.
|
Operating margin (%) |
|||||
|
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
Barratt Developments |
15.2% |
15.8% |
17.4% |
17.7% |
18.9% |
|
Bellway |
20.4% |
22.0% |
22.3% |
22.1% |
21.0% |
|
Berkeley |
24.7% |
24.5% |
27.8% |
28.8% |
26.0% |
|
Countryside Properties |
16.7% |
18.2% |
16.1% |
14.7% |
15.9% |
|
Crest Nicholson |
20.3% |
20.4% |
20.3% |
16.0% |
10.5% |
|
Persimmon |
21.9 % |
24.8 % |
27.9 % |
29.0 % |
31.0 % |
|
Redrow |
18.5 % |
18.9 % |
19.4 % |
19.9 % |
18.3 % |
|
Taylor Wimpey |
20.3 % |
20.8 % |
21.0 % |
21.4 % |
19.6 % |
|
Vistry |
17.3 % |
15.2 % |
11.8 % |
16.4 % |
16.0 % |
|
Total |
19.5 % |
20.2 % |
21.4 % |
21.8 % |
20.9 % |
Source: Company accounts
“As a result, Crest Nicholson’s shares peaked in spring 2017, unless most of those of its quoted building peers, such as Barratt Developments, Berkeley or fellow FTSE 250 firm Vistry, which were still setting fresh highs in January of this year.
“But that record of disappointment meant the shares were looking cheap on an asset basis, even if metrics using earnings and dividends looked less appealing. Crest Nicholson’s last published set of results revealed net shareholders’ funds, or net asset value (NAV), of £808 million, yet the company’s market cap is still barely £650 million, even after today’s romp.
“That discount to net asset value offers a degree of downside protection in the event of an extended lockdown or double-dip recession while still providing potential for upside, as house builders can trade toward twice NAV at the peak of a cycle.
|
|
Historic |
2020E |
2021E |
2020E |
202E |
2020E |
2021E |
|
|
Price/NAV(x) |
PE (x) |
PE (x) |
Dividend yield (%) |
Dividend yield (%) |
Dividend cover (x) |
Dividend cover (x) |
|
Vistry |
0.60 x |
11.7 x |
5.2 x |
0.3% |
4.9% |
26.0 x |
3.88 x |
|
Crest Nicholson |
0.81 x |
19.8 x |
11.3 x |
0.0% |
3.6% |
n/a |
2.50 x |
|
Redrow |
0.93 x |
13.0 x |
7.4 x |
0.4% |
4.1% |
20.25 x |
3.29 x |
|
Bellway |
1.00 x |
15.5 x |
9.0 x |
2.1% |
3.9% |
3.13 x |
2.84 x |
|
Taylor Wimpey |
1.00 x |
20.1 x |
9.5 x |
2.4% |
6.2% |
2.08 x |
1.71 x |
|
Barratt Devp. |
1.09 x |
13.0 x |
9.9 x |
0.0% |
4.0% |
n/a |
2.50 x |
|
Berkeley |
1.69 x |
13.0 x |
12.3 x |
4.7% |
5.5% |
1.65 x |
1.47 x |
|
Countryside |
1.74 x |
54.8 x |
15.8 x |
0.0% |
1.8% |
0.00 x |
3.53 x |
|
Persimmon |
2.22 x |
11.1 x |
10.2 x |
5.0% |
8.6% |
1.80 x |
1.14 x |
|
TOTAL |
1.34 x |
14.0 x |
9.9 x |
2.6% |
5.6% |
2.73 x |
1.81 x |
Source: Sharecast, consensus analysts’ forecasts for earnings and dividends, company accounts for historic NAV figures, Refinitiv data
“Crest Nicholson had been the cheapest builder on a price-to-NAV basis until this week, as it arguably had the most to prove after the miscues and margin disappointments of 2018-19, but that did mean it offered the most gearing into any market recovery too.
“Vistry is now the cheapest builder on a book, or asset, value basis, but any of those names that trade around one times NAV may catch the eye of value hunters. After all, the Government continues to throw everything that it can at the housing market, be it a holiday on stamp duty, extensions to the Help-to-Buy scheme or the Prime Minister’s October affirmation Conservative manifesto promise to offer young, first-time buyers fixed-rate, long-term mortgages worth up to 95% of the property.
“Whether all of these schemes make actual sense from the point of view of economics is frankly unclear. It is the high cost of dwellings relative to incomes that is the problem, not demand for housing. Trying to boost demand without a marked increase in supply does not look likely to help solve the real issue at hand and could have the unintended consequence of driving house prices higher, or at least supporting them, to possible benefit of house builders.”
