Crest Nicholson struggles to reposition

Anaemic house price growth is nothing new in London and the south-east. In London, house prices fell by 0.4 per cent in September compared with a year earlier, the worst performance of any region, according to the Office for National Statistics House Price Index. House prices in the capital have recorded an annual decline every month since June 2018, according to the index.

However, Crest Nicholson’s latest market update indicates that the sales environment may be even worse than feared. Peter Truscott, who was appointed as chief executive in September, announced the group would write-down the carrying value of some of its legacy London sites by around £10m. In addition to this worrying sign, a £17m provision was taken against costs relating to the government’s guidance notes for combustible materials, fire risk and protection following the Grenfell fire disaster.

The trading difficulties caused by a “volatile” sales environment during the second half of the financial year were also reflected in a cut to underlying pre-tax profit guidance for 2019 from the £170m-£180m expected 12 months ago to £120m-£130m, falling to £110m-£120m in 2020.  

From 2021, management said it expects strong profit growth. As part of a range of self-help measures, the group will take a more “selective” approach to land sales – which have previously been a sizeable contributor to profits – “where the company has adequate outlet capacity and infrastructure is already in place”. It also plans to complete more multi-tenure developments, which will include partnership work with local authorities and registered providers, in a bid to protect returns on capital expenditure and boost the sales rate. 

An increased focus on multi-tenure partnerships did help reduce net debt and deferred land creditors by 14 per cent to £260m during the first half. However, given this type of work is less profitable, the first-half operating margin fell from 16.8 per cent to 14.1 per cent. With sale prices deteriorating, margins could erode further, although the company's ambition is to move profitability closer to that of rival mid-cap housebuilders. 

Management has committed to maintaining the annual dividend of 33p a share for 2019 and 2020, as long as there is no significant deterioration in trading. However, this payout would imply a 9 per cent dividend yield at the current share price, which suggests the market is sceptical about the dividend prospects being made rather than implying a bargain. Dividend coverage by earnings has declined for the past three years, falling to 1.7 times in 2018, from a multiple of 2.0 in the prior year and 2.25 in 2016. In that time, cash generated by operations has also deteriorated – in 2016 the group delivered a net cash inflow of £154m, compared with £62m in 2018 and an outflow of £26m during the first half of 2019.