Crest Nicholson set to grow

Housebuilder Crest Nicholson's (CRST) progress since its partial flotation in mid February has been impressive – the shares have risen 40 per cent from the strike price over a period when the housebuilding sector rose just 12 per cent. That significantly reflects the fact that the 220p-a-share offer price represented a discount to the group's reported net asset value. Accordingly, there has been a catch-up process with the other main housebuilders – their shares, without exception, all trade at a premium to their respective net asset values.

But further progress looks likely, too, thanks in part to Crest's focus on the more lucrative south-east market. In the year to October 2012, operating profits rose 28 per cent to £73.3m and, despite investment in a new division, administrative costs as a percentage of sales fell from 11 per cent to 9.5 per cent. That, in turn, helped to boost operating margins to a hefty 18 per cent – not far short of the 19.6 per cent achieved by market leader Berkeley Group. Crest Nicholson also has an impressive land bank and, last year, it was able to pull though enough land to more than meet the 1,882 new homes delivered. On top of the 12,623 plots in the strategic land bank, the group also has a short-term land bank of 16,959 plots.

Numis Securities says...

Add. Crest Nicholson is well capitalised and has the potential to expand the business faster than its peers. That reflects the unrivalled land supply – its consented land bank is the biggest of all the housebuilders – as well as its geographic position and a growing London division. On a valuation basis, and while margins may not show much growth, increased sales rates will drive further revenue generation and support pre-tax growth of 20 per cent a year between 2012 and 2015. Using a weighted average cost of capital of 9.25 per cent and an annualised post-tax 2014 return on tangible equity of 16.4 per cent, we estimate that Crest's shares should be trading at around 352p. Expect pre-tax profits of £80.2m for 2013 and EPS of 24.3p.

Peel Hunt says...

Buy. Much of Crest Nicholson's strength comes from the impressive size of its land bank, which, after adding the short-term land bank to the strategic land bank, has an estimated gross development value of £6.56bn. But there are other aspects that set the group apart from rival housebuilders, not least its close liaison with the Homes and Communities Agency – that has helped Crest to secure high levels of what remains of social housing grant funding and generous injections from various state-sponsored incentive schemes. Moreover, the shares still look attractive compared with those of other housebuilders because, despite the recent rise, they are still trading at a discount to our forecast net asset value for 2013 of 453.7p.