ii view: Crest Nicholson shares are surging

Full-year profit estimates for this mid-sized UK housebuilder will now be raised. Here’s why.

Full-year trading update to 31 October

• July to September sales rate of 0.54, up from 0.37 in the first half
• Net cash up 263% to £135 million

Guidance:

• Expects profit at the upper end of the previously guided £35 million to £45 million
• Planning to recommence the dividend payment

Chief executive Peter Truscott said:

“Although the macro-economic outlook is uncertain our strategy will remain unchanged. We will maintain our strong focus on delivering operational efficiencies and if our trading becomes significantly disrupted we will act decisively again to protect our enhanced balance sheet. However, we expect the housing market to remain resilient to the impacts of COVID-19 and as such we are well positioned to capitalise on that demand, particularly considering our product range and focus in Southern England.”

ii round-up:

Housebuilder Crest Nicholson (LSE:CRST) forecast full-year profit comfortably above current City forecasts and towards the upper end of its previously outlined range of £35 million to £45 million. 

Analysts had been predicting an outcome nearer to £38 million following a loss of £51 million in the election and Covid-hit first-half. 

Crest Nicholson shares rose by more than 15% in UK trading, leaving them down around 40% year-to-date. A positive read-across also gave shares for rivals Taylor Wimpey (LSE:TW.), Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) a lift.  

Pent-up demand - the result of Brexit uncertainty and Covid disruption - combined with the benefits of a stamp duty holiday, had fuelled good summer trading. Its weekly sale rate for the July to September period had risen to 0.54, up from a first-half 0.37. End of October forward sales stood at £480 million compared to last October’s £378 million. 

Measures to conserve cash during the pandemic, including suspending the dividend payment, had helped strengthen the balance sheet, lifting cash held to £135 million from £37 million this time last year. As such, and given better trading and confidence in the outlook, Crest is now preparing to recommence the dividend payment. 

Crest builds houses and flats across the southern half of England and the Midlands. Alongside full-year 2019 results in January, management had also outlined an updated strategy. Under its new focus, annualised cost savings of over £15 million had been generated compared to 2019. 

ii view:

Crest builds a mixture of houses, flats, and some commercial premises as part of its larger developments. Progress to date against a renewed strategy, includes identifying around £40 million of gross margin improvements through better design and plotting efficiency, plus building a strong network of multi-channel partners to improve sales performance. 

For investors, the upgrading of profit expectations still leaves the forecast outcome of around £45 million comfortably below last year’s £121 million. The impact of a renewed lockdown across England is also yet to be quantified. But the pending recommencement of a dividend payment resurrects a key attraction across the housebuilding sector, while a stamp duty holiday shows once again that the government stands in support of the sector. In all, and despite risks, housing demand looks to be back which offers a tailwind to long-term supporters of this mid-sized UK housebuilder.    

Positives: 

• Expects upper end of range full-year profit
• Pursuing a cost saving programme

Negatives:

• Full-year profit is still expected to be down on 2019
• Government’s ‘Help to Buy’ scheme due to end in 2023

The average rating of stock market analysts:

Strong hold