Crest Nicholson exposed to looming downturn

Like peers, Crest suffered a steep fall in completions due to the closure of construction and sales sites during lockdown, which declined by more than a third during the six months to the end of April. But more concerning was a £43m impairment against the value of its inventory, which included the abandonment of a scheme in Kent that was no longer deemed to be profitable. The impairment figure was based upon the assumption of a7.5 per cent reduction in average residential sales prices and a 32 per cent fall for commercial units within its developments. This followed a £10m write-down in thecarrying value of some of its legacy London sites in November last year, when recently appointed chief executive Peter Truscott unveiled a series of self-help measures, including plans to retreat from the London market and increase the proportion of affordable housing completions.

Given house price growth in London has rebounded at a slower rate than elsewhere in the country since the housing market emerged from lockdown, Mr Truscott’s decision continues to make strategic sense. However, pressure on private sales prices and an increase in lower-margin affordable and bulk completions meant that even before Covid-19 reared its head operating margins were among the lowest in the UK-listed sector. During 2019 its adjusted operating margin was just 12.2 per cent, which compared with margins around the 20 per cent mark for fellow FTSE 250 housebuilders such as Redrow (RDW) and Bellway (BWY). It is also lower than the 17 per cent figure reported by Vistry (VTY) for 2019, which has also repositioned itself towards building more affordable housing.

Crest’s low operating margins make it more susceptible to the damage inflicted to profitability from a fall in sales prices this year, which are forecast to drop by 7.5 per cent by agent Savills (SVS). Together with a sustained lower level of completion volumes during the second half of the year, which broker Peel Hunt anticipates will be broadly consistent with those suffered during the first half, management has guided towards adjusted pre-tax profits of between £35m and £45m this year.

Sales of properties in bulk lots to the private rented sector and registered social housing providers suffered in the wake of the pandemic as decision making was deferred. However, targets to increase the proportion of bulk deals to between 15 and 20 per cent of the overall mix and affordable completions to between 20 and 25 per cent of completions could help boost the group’s return on capital employed and result in less volatile sales rates by reducing reliance on the open market.