ii view: has Crest Nicholson share slump gone too far?

AGM trading update from 1 November to 15 March

ii round-up:

Housebuilder Crest Nicholson Holdings (LSE:CRST) today detailed extra costs in relation to legacy build issues despite reporting trading largely in line with City expectations.

Remediation works estimated at up to £15 million are now required over the next three years, with management also now appointing third-party consultants to provide greater assurance on the adequacy of current group provisions.

Shares in the FTSE 250 company fell as much as 12% in UK trading having come into this latest news up by 7% over the last year. That’s similar to both Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) over that time, but well behind the 66% rise for affordable homes builder Vistry Group (LSE:VTY).

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Like other housebuilders, Crest Nicholson sales have recently improved, climbing to a rate of 0.52 per site per week during the eight weeks to 15 March, up from 0.40 at the start of the current financial year in November. 

Management pointed to moderating build cost inflation with some evidence of lower labour costs, along with continued challenges in the planning system. 

Group guidance for build completions of between 1,800 and 2,000 homes remained unchanged, but with the weighting of new builds now strongly focused on the second half at around 65% of completions. 

Company net debt in late February was tracking lower than expected due to lower build and new land spending, with the trend expected to continue into the remainder of the financial year.

First-half results to late April are likely to be announced early to mid-June. 

ii view:

Started in 1963, Crest today builds a mixture of houses, flats, and some commercial premises largely across the southern half of England and the Midlands. Total builds of 2,020 during its last full financial year were down from 2,734 units in the previous year, with the average selling price of £406,000 up from £388,000. 

For investors, a review by third-party consultants could potentially add additional remediation costs. Latest remediation work costs of £15 million add to previous costs of £5.5 million and a £13 million exceptional charge in relation to a fire related legal claim. The backdrop for customers remains tough given still elevated borrowing costs, while the shares now offer a forecast dividend yield of just 2% given an expected payment reduction. 

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On the upside, sales rates have improved, likely aided by some easing in mortgage rates given expectations for interest rate cuts this year. The relatively new chief executive brings nine years of senior role experience from major builder Persimmon, a previous focus on costs has included headcount reductions, while sector consolidation has seen Barratts bid for Redrow (LSE:RDW).  

In all, signs of improved consumer demand are pleasing with the relatively new CEO attempting to put to bed legacy issues. Nonetheless, more cautious investors are likely to demand further evidence of a recovery before taking the plunge.

Positives: 

• Resilient selling prices 
• Hopes for reduced interest rates

Negatives:

• Continued legacy redress costs
• Expected rebasing or cut to the dividend payment

The average rating of stock market analysts:

Strong hold