Crest Nicholson growing fast

Crest Nicholson (CRST) is taking full advantage of the upturn in the housing sector, revealing in a trading statement this month that open-market reservations had increased by 46 per cent between 1 May and 6 September 2013.

Sales have been steadily improving since the start of the year, accelerating still further after the introduction of the government's Help to Buy scheme in March. Indeed, forward sales for 2014 and beyond rose 92 per cent to £145m, and the improvement in trading conditions was highlighted by a significant drop in cancellation rates - from 15.8 per cent last year to 10.5 per cent. Operating outlets rose from 39 to 46, and a further 18 sites have been bought so far this year, equivalent to 1,854 plots.

Land prices have remained pretty stable, allowing the group to achieve targeted hurdle rates for gross margins and return on capital. However, there was some pressure developing in the supply chain - leading to cost increases in certain building materials - although the group expects to deliver its planned production output for the year to 31 October. Crest Nicholson has also drawn down £3.5m of funding under the government's Build to Rent scheme in connection with the delivery of 102 units in Southampton - that's part of government plans to develop an institutional private rental sector.

Numis Securities says…

Add. A near-doubling of the order book will not have a material impact on the current financial year, but will boost revenue in 2014. In fact, we believe the company could reach 3,000 completions in 2014 without any structural change in the business. The return on capital employed could be further enhanced, too, by the group's move into the build-to-rent sector. On our estimates, the shares are trading on 1.68 times net tangible assets for 2014, falling to a below-sector-average 1.46 times for the year after - not high given our forecast of a 22-23 per cent return on capital employed. Accordingly, we are upgrading our 2014 estimates by 10 per cent to pre-tax profit of £104.1m, giving EPS of 31.9p, with 24.3p expected in 2013.

Barclays Capital says…

Overweight. Strong reservation rates have prompted us to upgrade our EPS forecasts by 8 per cent in 2013, to 25.6p, and by 5 per cent for 2014, to 31.7p. However, following a sharp rise after the partial flotation earlier this year, the shares have fallen around 10 per cent in the past two months. That leaves them rated at a discount to the sector, both on a PE basis and on a price-to-net-tangible-assets basis - a discount we feel is unjustified. Indeed, our price target of 390p puts Crest Nicholson's shares on a premium of 10 per cent to the sector, which we feel is justified by Crest's significant exposure to southern England and its superior growth in sales.