Shares in housebuilders took a knock in the first quarter of this year as investors showed their concern over the prospect of an early rise in interest rates. Come August, most of these worries had dissipated, and since the start of that month shares in Barratt Developments (BDEV), for example, have recovered 14 per cent, while Persimmon's (PSON) shares are up by 9 per cent. Not so with Crest Nicholson (CRST), whose shares have slipped nearly 6 per cent over the same period, leaving them trading at 1.4 times 2015 forecast net assets and at just seven times forecast earnings. That's too cheap.
- Shares cheaply rated
- Attractive dividend yield
- Substantial land bank
- Output forecast to rise 15 per cent
- Recent slowdown in sales
- Forward sales lower
It's true that sales growth has slackened over the last couple of months, but this applies to the rest of the sector, too. There are two reasons behind the slower growth; comparable figures were boosted significantly by the effect of Help to Buy, introduced early in 2013, while in the summer months most potential buyers are usually busy getting a tan, and not trailing round sales outlets.
So perhaps the modest rating reflects concern over the fundamental metrics and the trading performance. Open market reservation rates over the four months to September averaged 0.87 per outlet per week, down from 0.95 achieved a year earlier. It's also true that forward sales for the next financial year are currently down, but this reflects the adoption of a strategy whereby units are categorised as forward sales at a more advanced stage of construction. Even so, output for the year to the end of October is expected to have risen by 15 per cent from a year earlier.
To allow for a sustained increase in output, Crest has increased the number of sales outlets and opened a new trading division in Hertfordshire. Trading starts in November, and is expected to make a noticeable contribution to profits in the next financial year. Crest has also been extending its land bank. The group has acquired 17 new sites so far this year, bringing an additional 1,779 plots, while a further five sites with 885 plots have been converted from the strategic land bank. Together these have increased the gross development value of the short-term pipeline by 21 per cent to £4.7bn, up from £3.9bn a year earlier. The strategic land bank currently stands at nearly 17,000 plots.
Crest's position on building land is also strong. Plots to meet the entire projected output for 2015 have already been secured along with planning consent, and land for 2016 has also been secured - most with planning permission. This puts the group in a secure position, and is highly supportive of management targets to grow revenue by up to 80 per cent between 2013 and 2016.
| CREST NICHOLSON (CRST) | ||||
|---|---|---|---|---|
| ORD PRICE: | 334p | MARKET VALUE: | £840m | |
| TOUCH: | 332-334p | 12-MONTH HIGH: | 420p | LOW: 308p |
| FORWARD DIVIDEND YIELD: | 4.6% | FORWARD PE RATIO: | 7 | |
| NET ASSET VALUE: | 192p | NET DEBT: | 12.5% | |
| Year to 31 Oct | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011** | 319 | -27 | na | nil |
| 2012** | 408 | 62 | 28.5 | nil |
| 2013 | 526 | 87 | 28.9 | 6.5 |
| 2014* | 637 | 118 | 36.6 | 12 |
| 2015* | 767 | 148 | 46.3 | 15.5 |
| % change | +20 | +26 | +27 | +29 |
Normal market size: 5,000 Matched bargain trading Beta: 1.04 *Peel Hunt forecasts, adjusted PTP and EPS figures **Prior to flotation | ||||
Operating margins at the half year were up slightly to 18.5 per cent. However, with administrative costs tending to be higher in the first half - 40 per cent of revenue matched by 50 per cent of costs - operating margins for the full year are expected to be nearer 20 per cent, which is bang on the sector average.
Finances are pretty strong, too, although last year's net cash position has disappeared as a result of expenditure on new sites and land acquisitions. Even so, year-end net debt is forecast to be around £60m, which gives pretty modest gearing of around 12.5 per cent. What's more, a new £200m revolving credit facility was secured earlier in the year, with an £80m ancillary facility, with maturity dates of March 2019, over half of which was undrawn at the half-year end.
Progress has been impressive since Crest Nicholson's part flotation in February 2013, and since then it has built up a significant land bank. And this has not been achieved without due regard to meeting investment criteria. In fact, minimum hurdle rate returns on capital employed have recently been increased to between 22 and 24 per cent, depending on location.
