New chief knocking McCarthy & Stone back into shape

A warning in June is consigned to history, and the retirement homes specialist is repaying faithful shareholders, reports Graeme Evans.

McCarthy & Stone unveiled a big shift in strategy today as it bids to reverse a decline that has made this former £1 billion stock the poor relation of the housebuilding sector.

Under new chief executive John Tonkiss, the retirement homes specialist will shift its focus away from growth towards margins and return on capital employed (ROCE).

Tonkiss wants the next three years to be about increasing shareholder returns, as well as achieving a reduction in McCarthy's exposure to market cyclicality.

His confidence in the new strategy was highlighted by the pledge today to keep the 2018 dividend in line with a year earlier. Stronger cash flows should also allow the company to review its capital allocation policy on a regular basis.

The change of plan was welcomed by investors, with the stock up a much-needed 8% to 132p. It had been languishing at below 100p earlier this summer, having joined the stockmarket in November 2015 at twice this level.

Source: interactive investor (*)      Past performance is not a guide to future performance

While other housebuilders have performed well in the past year, conditions have not been so favourable for Bournemouth-based McCarthy. It is reliant on customers being in a position to sell their own homes, which has not been easy in the current climate for second-hand properties.

And whereas other housebuilders have enjoyed government assistance such as from the Help to Buy scheme, McCarthy has instead been caught in the crossfire of Whitehall's crackdown on leasehold practices.

McCarthy's new strategy represents a "shift in the business mindset", with a greater focus on offering affordability, flexibility and choice for customers.

It continues to expect sales volumes of around 2,100 a year, but with the return on capital employed rising to 15% by full year 2021, alongside operating margins of over 15%, and annualised cost savings of £40 million.

With an expected 88% increase in the number of people aged 85 and over by 2037, McCarthy aims to create "even deeper and longer relationships with our customers".

Tonkiss said:

"We are more than just a housebuilder, as we create retirement communities that enrich the quality of life of our customers and their families."

Having adjusted its forecasts, Peel Hunt said McCarthy's shares were now trading on a price to net asset value multiple of 0.9x for 2019, with a price earnings multiple of just over 10x and dividend yield of 4.8%.

Increasing its price target to 150p, Peel added:

"Given these positive moves to improve profitability and the resulting pick-up in ROCE, we feel more comfortable valuing the group on a small (15%) premium to net asset value."

Analysts at UBS are more cautious and still have a 'sell' recommendation, despite seeing today's announcement as a "positive step in the right direction".

They warned that the business remained highly exposed to a still slow second-hand market.

UBS added:

"We think McCarthy's prior strategy of pursuing volume growth has led to a significant increase in finished and unsold stock which will likely drag returns if McCarthy does not use incentives to clear inventory."

*The horizontal lines on the chart represent previous technical support and resistance. The red line represents the recent uptrend.