Rebuilding in progress at Crest Nicholson

Crest Nicholson (CRST) returned to profit as sales rebounded and the balance sheet was strengthened, with the final dividend restored on the back of a good performance. But, as with other housebuilders, the ongoing cladding scandal is a continuing headache for the group.  

That scandal, which the sector has been facing since the Grenfell Tower disaster, shows little sign of letting up. Uncertainty reigns after Michael Gove, the secretary of state for housing, communities, and local government, recently announced that the state will force housebuilders to pay £4bn to rectify unsafe cladding.

Management said that they are “carefully considering the impact of this update and [representing] views through the Home Builders Federation”. Analysts will be watching closely, as the full extent of the financial damage remains to be seen. Crest put through a net exceptional charge of £29m for fire safety and cladding costs in the year, taking the group’s total provisions to £43m.

On a brighter note, revenue growth of over 15 per cent should bring some comfort to investors. Home completions were up by over 7 per cent this time around to 2,407, after plunging by almost a quarter the previous year, as the market benefited from the extension of the stamp duty reduction.

Crest’s forward sales position is also encouraging. As at mid-January this stood at over 2,700 units. But revenue remains below pre-pandemic levels, and it could be several years before the £1bn mark is breached once again.

The balance sheet looks more robust than it has for some time. Net cash was up by over £100m, helped by a £46m injection from the sale of Crest’s stake in a Surrey film studio joint venture.

Progress was made towards management’s ambitious medium-term targets. It wants to see operating profit margins of 18 to 20 per cent and return on capital employed of 22 to 25 per cent. Both metrics were significantly up on last year – the group posted 12 per cent and 17 per cent for each, respectively. Numis analysts said that “the group looks well placed to meet its medium-term objectives and this is not reflected in the current rating”.

Consensus forecasts have the shares trading on a forward price/earnings ratio of nine times for fiscal year 2022 and eight times for 2023. While analysts expect Crest’s returns to continue to trail major peers, and the cladding scandal is ongoing, progress is being made toward a better future. Hold.

Last IC View: Hold, 318p, 26 Jan 2021