Retirement homes builder McCarthy & Stone PLC (LON:MCS) warned that it has seen a slackening off of reservation rates in the second quarter of 2018.
The shares lost one-sixth of their value after the company also announced that the chief executive officer, Clive Fenton, having reached the age of 60, will be retiring at the end of August.
READ: McCarthy & Stone puts plan in place to offset impact of crackdown on ground rents
The company, which got a massive pout on after the government announced in December it will force developers to cut controversial ground rents to zero for new homes, said it now expects to complete between 2,100 to 2,300 homes in 2018, compared to 2,302 legal completions in 2017.
It said operating profit in 2018 is expected to fall to somewhere between £65mln and £80mln from £96mln in 2017 with the profit impact of the unit shortfall skewed to the South, where the group’s average selling prices are higher. Broker Peel Hunt had, prior to the profit warning, been forecasting operating profit of £112mln.
The group's forward order book including legal completions currently stands at around £706mln, up from £639mln at the same stage last year but lower than management's expectations.
A strategic review is in progress but the CEO won't be around to implement the proposed changes
The chairman, Paul Lester, joined the board at the beginning of the year and in April initiated a strategic review, with the emphasis on seeking to improve margins and the return on capital employed in conjunction with what it called “a more balanced workflow”.
The company said this will naturally lead to a “more measured growth trajectory” that would require the group to cut its cost base, with build cost savings as an additional key area of focus.
As outlined in its half-year results presentation, McCarthy & Stone will also be trialling a number of strategic initiatives designed to increase customer appeal and offer a broader choice of tenure options including rental and part ownership.
The chief executive, Clive Fenton, won’t be hanging around to implement the new strategy, however.
“Since Brexit, in the absence of any Government support and now with the additional challenges posed to the business by the proposed ban on ground rents, it is clear that the group must embark on a new strategy to carry it safely through the next five years and beyond,” Fenton said.
"Having reached the age of 60, it is right that I now stand aside at the end of our financial year to enable a new chief executive to be responsible for this journey,” Fenton said.
The company's niche position is not without its drawbacks
Russ Mould, the investment director at wealth management firm AJ Bell, said the company was no stranger to trading setbacks since it rejoined the stock market in November 2015.
“You may have thought a housebuilder specialising in properties for people in retirement would be a simple, steady growth business; however, today’s profit from McCarthy & Stone would suggest this activity is not bulletproof,” Mould said.
“Customers are being more cautious and prices are falling, particularly in the South East. Visibility is poor over the type of profit margins and returns the group can achieve in the near-term,” he added.
“Housebuilders have dominated the headlines over the past five years or so, thanks to very generous dividends and churning out hefty profits. McCarthy & Stone’s situation, even though it only operates in a niche part of the market, is a stark reminder that housebuilders aren’t immune from problems in the bigger world,” Mould said.
McCarthy & Stone’s shares currently trade at around 109p, down from 157.8p at the start of the year. Peel Hunt has calculated the net tangible value at 130p per share, which it said would be a "key anchor" level over the next six to twelve months.
McCarthy & Stone boss to step down after profit warning https://t.co/0Wp8RMJnjK pic.twitter.com/dQ0X2vKwR1
— Construction (@construct1on) June 19, 2018
McCarthy & Stone retirement homes:
“Noticeabl decline in reservation rates as customers have exercised more caution due to ongoing economic uncertainty, slower secondary market & softening of pricing, esp in South East”
Or they’ve realised the properties are overpriced?
— Louise Cooper (@Louiseaileen70) June 19, 2018