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Crest Nicholson

Crest Nicholson still struggling in London but says build cost inflation has moderated

Management has changed tack. It will now shift its focus from growth towards greater cash generation, with a strong emphasis on partnering to deliver more homes

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A reduction in sales demand continues to be experienced at the higher price points

Crest Nicholson Holdings PLC (LON:CRST) said 2018 had been a challenging year in a difficult market as it revealed a 15% fall in profits, although its shares managed to rally as the decline was largely as expected and the housebuilder maintained its dividend.

The FTSE 250-listed firm, which saw its share price slump from 545p to 328p in 2018 after its margins came under pressure, said it had a good year operationally but had faced some challenges in London, where the upper end of the market came off the boil in an environment of political and economic uncertainty.

READ: Crest Nicholson CFO steps down as tough London housing market hits profits

The builder completed 3,020 units in the year to the end of October 2018, up 3% from 2,935 units in the year before.

The nation's capital city continued to be a black spot for the company, with management speaking of “stretched affordability” (i.e. prices are too high for many people) and a general belief that house prices in zones 1-3 of the tube network, where Crest has been selling, are set to fall.

Outside of London, a reduction in sales demand continues to be experienced at the higher price points, where the purchasing decision is typically more discretionary, according to Crest Nicholson.

Revenue rose 9% to £1.14bn from £1.04bn the year before. Profit before tax fell to £176.4mln from £207.0mln while operating profit declined by 3.6 percentage points to 16.7% from 20.3%.

As previously announced, build cost inflation put margins under pressure with matters not helped by the weakness of sterling and the continued pressure on wage and salary costs driven by the overall shortage of skilled labour serving the industry.

Gross margins for the year were lower at 22.4% (2017: 26.4%). Pricing softness and additional costs in London had the most individually significant impact, with a number of projects exceeding initial cost estimates, said Crest Nicholson, which parted company with its chief financial officer in October.

Dividend maintained

The net cash position declined to £14.1mln from £33.2mln the year before but the group maintained its dividend, recommending a final dividend of 21.8p, making the full-year dividend 33p.

“Our forward sales are strong, boosted by our strategic partnerships and our new channels to market. Pricing is stable, build cost inflation has moderated and we have implemented plans to mitigate margin pressure, which will take effect progressively over the next few years,” said Patrick Bergin, the chief executive officer of Crest Nicholson.

“Our revised business strategy and focus on cash generation underpin our confidence in generating sustainable shareholder returns," he added.

Shares bounce, Liberum repeats 'buy'

In late morning trading, following recent falls, shares in Crest Nicholson bounced 6.9% higher at 365p.

In a note to clients, repeating a ‘buy’ rating on the stock, analysts at Liberum Capital said: “Crest Nicholson’s results were broadly as expected, with PBT down 15% to £176m, mainly due to margin pressure as markets in London and the Home Counties saw limited selling price inflation and 3% build cost rises.

“Looking forward, the outlook remains challenging, and we do not expect Crest Nicholson to pursue completions at any cost, so we cut our estimates by 7-11% across the forecast period.”

“However,” Liberum’s analyst said, “Crest has repositioned land to offer cheaper product ranges, is setting up partnerships and starting to save costs in building, all of which should support profit progress in future.”

They concluded: “We find the shares supported by our unchanged dividend forecasts (33p), strong cash flow in 2018 and further forward and the Oct 19E NAV of 351p –which underpins our target price of 390p.”

 -- Adds share price, analyst comment --

Quick facts: Crest Nicholson

Price: £3.96

Market: LSE
Market Cap: £1.02 billion
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