It seems the summer has been a washout for the UK housebuilders in much the same way as it has for holidaymakers opting to take a 'staycation'.
And in fact, there appear to be few signs of the dark clouds lifting - for the sector at least.
Crest Nicholson provided some grist in the form of its unscheduled trading update. It paints a picture of a sector grappling with the headwinds of high inflation and rising interest rates. But is this a temporary blip or a sign of deeper structural issues?
Deeper dive
UBS's recent research note on Crest Nicholson PLC (LSE:CRST) offers some insights. The investment bank highlighted the company's struggle with weak demand trends, primarily due to tight affordability and economic uncertainty. For the uninitiated, this means that potential homebuyers are either finding it too expensive to buy or are wary of the broader economic landscape.
The numbers tell a story of their own. Crest Nicholson reported that sales per outlet per week stood at a mere 0.25 in the seven weeks leading up to 18 August.
This is a stark drop, being half of its previous forecast. Such figures have understandably spooked investors, leading to a 14% slump in the company's share price. The anticipated pre-tax profit for the 2023 financial year is now around £50 million, a figure that broker Peel Hunt noted is significantly below the current consensus of £73 million.
Wider malaise?
But Crest Nicholson's woes aren't isolated. The ripple effect was evident as other giants in the sector, including Taylor Wimpey PLC (LSE:TW.), Persimmon PLC (LSE:PSN), and Barratt Developments PLC (LSE:BDEV), saw their shares decline by 4.0%, 2.7%, and 1.8% respectively. It's clear that the entire sector is feeling the pinch.
UBS remains 'neutral' on the housebuilder, pointing out several challenges. Crest Nicholson has the lowest margins in its sector, making it particularly vulnerable to house price declines.
Its primary markets in the South East are also seeing stretched affordability, and legacy sites continue to drag on profits. However, there's a silver lining. The company's net cash balance sheet, as UBS notes, might offer some protection against further downside.
Downgrade
Unsurprisingly, UBS got out the red pen to downgrade its valuation of Crest Nicholson's shares. The bank has revised its price target to 185p, a noticeable drop from the previous 245p.
This adjustment reflects not only the negative earnings revisions but also UBS's reduced assumptions on the company's return on capital employed (ROCE).
Such a downgrade, especially from a major investment bank, can weigh heavily on investor sentiment and further underscores the challenges the company faces in the current market environment.
The housebuilder's statement offers a glimpse into the broader market dynamics. While house prices have remained stable due to limited supply and few distressed sellers, economic uncertainty is keeping potential home movers at bay.
With transaction levels across the industry weakening, especially in recent weeks, Crest Nicholson doesn't anticipate any significant improvement before the year's end.
Crumbs of comfort?
Yet, in a move that might reassure some investors, the company plans to hold its dividend at 17p. Talks are also in progress on several bulk deals with partners, which could support volume delivery in the coming years.
However, Peel Hunt warns that this might also impact profits.
In a bid to streamline operations and perhaps mitigate some of the challenges, Crest Nicholson is cutting costs.
A notable change is the incorporation of the newly created East Anglia division into its existing Eastern division with revised boundaries.