Crest Nicholson - riding the crest of a wave

Crest Nicholson: UK house building has a history of boom and bust. At the moment though it is in a sweet spot. The economy is well past the financial traumas of 2007/8. The population is growing steadily, with inward migration well entrenched. Interest rates are at all time lows, resulting in cracking mortgage deals for some buyers. Affordability is a much-debated issue, but the sheer pent up demand for new houses is very supportive of the market. There is also huge political will to win votes by holding prices up (e.g. various help to buy schemes including the ISA buyers carrot in the pre-election budget). Land prices are not at dangerous levels and the planning process is still slow enough to prevent a glut of new stock hitting the market. So it comes as little surprise to see Crest Nicholson produce sparkling interims today. In the six months to 30^th April 2015 (so including most of the modest market hiatus seen ahead of the election), revenue was up 38% to £333.2m, pre-tax profits up 52% at £58.3m (on the back of a 60bps operating margin expansion to 19.1%) and eps were up 51% at 18.6p. The dividend was hiked 56% to 6.4p and is one third of the likely annual total. At the period end net debt was a very manageable £60.6m, with the end year figure also guided to be “modest’, whilst the land bank now has a gross development value of £5.1bn (up 18.6% since October 2014). Some of all this sparkle was due to mix effects as they moved their product up market and land sales came through with a first half tilt, but that is not to diminish their achievements in these results.  

Looking forward the group guidance is for 20%-25% eps growth this financial year, with annual revenue on course for £1bn in FY 2016. They have also introduced a new annual revenue target of £1.4bn by 2019. There are margin pressures from labour and material costs, but rising selling prices are still acting as an offset. So growth towards the top end of their 20%-25% range indicates eps of around 49p, for a PE of 10.9x at 535p. The dividend guidance suggests an annual figure of 19.2p, for a near three times covered yield of 3.6%. The shares have performed very strongly since their return to the stock market, but there appear to be few clouds on the horizon at the moment. So buyers are not getting in at the ground floor, but equally it is very difficult to think of reasons why you would not want some house-building exposure at present and Crest Nicholson fits the bill. (Neil Cumming^, 16^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower