Crest Nicholson (CRST) has cut profit guidance for 2019 and 2020, citing a deterioration in London sales and additional costs to comply with government guidelines on fire safety.
Chief executive Peter Truscott, former Galliford Try (GFRD) boss who took up the post in September, has launched several self-help measures that include cutting overheads and taking a more selective approach to land sales. “Sales will only come from sites where the company has adequate outlet capacity and infrastructure is already in place,” management said. That will result in a lower contribution from land sales in 2020.
Management believes it can produce more sustainable returns in the long-term by developing more of its landbank rather than selling it on.
The housebuilder has been battling falling prices and transaction volumes in its core London and South-East markets, which have forced it to shift away from growing its open-market sales to pre-sales and partnerships with local authorities and registered providers. However, that has eroded the operating margin, which declined to 14.1 per cent during the first half of the year, from 16.8 per cent.
Pre-tax profits for 2019 are expected to come in at between £120m and £130m and guidance for 2020 was cut to a range of £110-120m. However, management reiterated plans to pay a 33p a share dividend for 2019 and 2020.
“Volatile” sales during the second half of the year have caused the group to write-down around £10m of the value of its legacy London sites.
The write-down was a “shock and should be a red flag for all house builders still operating in London,'' said Shore Capital analyst Robin Hardy. That could include housebuilders operating at the high-end of the market such as Berkeley (BKG), Barratt Developments (BDEV) and parts of Taylor Wimpey (TW.), he added.
While signs of a weakening London market have been flagged, “it’s really the extent of any market weakness you have got to get to before you start writing your land values down,” he explained.
The group is also taking a £17m provision against costs relating to the government’s guidance notes for combustible materials, fire risk and protection following the Grenfell fire disaster.
There is plenty of “fat to trim” at Crest Nicholson, argued Mr Hardy, which an overhead-to-sales ratio above the 3-4 per cent most peers operate at. That is due to lack of scale, he said.
“They basically didn’t reach the scale of business they thought they were going to reach,” said Mr Hardy.
