Interactive Investor

Stockwatch: A 10%-plus dividend yield worth a nibble

23rd October 2018 10:01

Edmond Jackson from interactive investor

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Short-sellers have helped this company halve in value since last year, but companies analyst Edmond Jackson thinks a price equal to net asset value and double-digit yield justifies speculative interest.

Shares in London and South East-oriented housebuilder Crest Nicholson have fared worse than the sector - down over 50% from their mid-2017 high, versus a circa 30% fall more generally over this period.  

The firm's 2018 slide has been relentless with about 5.75% of its issued equity currently being shorted; Henderson Global Investors raising its short to 2.81% or £22 million betting on further downside as of 10 October, and Squarepoint Capital raising its short to 0.5% after last week's profit warning – the company blamed that one on a tougher market for higher-value new homes.  Housebuilders are seemingly as in vogue to short as the high street retailers.

More positively, Crest's guidance for a £170-190 million pre-tax profit range in respect of its latest year to end-October, still implies a substantive business, and strategy has shifted to prioritise cash flow in support of a 33p dividend - to be paid also for the 2019 year assuming no material deterioration in market conditions.  

If the accounts can be trusted, then its stock has fallen below the 310.4p tangible net asset value (NAV) per share, as of end-April.  If you also trust Woodford Asset Management to get things right eventually, they have averaged down their buying into the drop, adding over 1% after this latest update to own 15.1%.  This week has started with news of how Crest's current executive chairman (re-appointed to oversee the new strategy) has bought £454,350 worth of shares at 302.9p.

How realistic is maintaining a 33p/share dividend?

The stock's rebound to over 310p, currently 308p, likely reflects sentiment tipping positively among buyers sat on their hands until the chairman's confident trade.  Mind this strategy shift, to run the business for cash than drive revenue growth, reflects tidying-up lest the market slows further, e.g. "accelerating bulk sales to social housing providers and selected land sales on long-tail sites".  

Quite some faith is needed, that sales initiatives together with reduced land expenditure will materially boost cash.  Last June's interim cash flow statement showed a £58.2 million net outflow from operations, although a £65.7 million outflow in 2017 improved to a £23.3 million inflow for the year overall.  

Thus a re-prioritising is required as market conditions soften and £139 million spent last year on a 33p dividend could be said to be paid by running down cash, with £40 million new loans backstopping the group.  At the end of last April, Crest had £102 million cash, so a radical improvement in cash generation is vital.  

Mind also, the table shows this 33p dividend ramping up very quickly from nothing pre-2014, in context of an operating margin around 20%.  That's not excessive versus Barratt which has a mid-teens percent margin and Persimmon in the mid-twenties, although Crest has reduced its guidance sub-18% now the London & South East market has not picked up as expected during autumn.  

My chief concern is the extent that Help to Buy - due to expire in 2020 – has bolstered housing in recent years and thereby housebuilders’ finances, of which this dividend is just one manifestation.  

So, an alternative explanation than evil short-sellers causing  Crest's fall, is the market probing for a level wary about how a 33p dividend is liable to be cut sometime after 2020, if not before, lest the new focus on cash flow fails to meet hopes quite like Crest's recent history of profit guidance.

Crest Nicholson Holdings - financial summary            
year ended 31 Oct 2013 2014 2015 2016 2017 2018
             
Turnover (£ million) 526 636 805 1,000 1,067  
IFRS3 pre-tax profit (£m) 80.9 117 154 195 207  
Normalised pre-tax profit (£m) 84.4 117 154 195 207 180
Operating margin (%) 17.4 19.5 20.0 20.4 20.3  
IFRS3 earnings/share (p) 26.7 38.7 48.4 60.9 65.1  
Normalised earnings/share (p) 29.9 38.7 48.4 60.9 65.1 56.5
Earnings per share growth (%) -4.1 29.5 25.1 25.8 6.9 -13.2
Price/earnings multiple (x)         4.7 5.4
Annual average historic P/E (x)   11.0 12.1 9.9 8.8 6.7
Cash flow/share (p) 8.3 -15.2 9.8 61.7    
Capex/share (p) 0.4 0.5 0.6 0.7    
Dividend per share (p)   10.6 16.6 22.4 33.0 33.0
Yield (%)         10.7 10.7
Covered by earnings (x)   3.7 3.0 2.8 2.0 1.7
Net tangible assets per share (p) 176 202 239 271 308  

Source: Company REFS          Past performance is not a guide to future performance

Stock trading around net asset value invites a takeover

Generally, it pays to buy into house-building shares when trading at or below NAV.  Yet this is usually a feature of the low point of the industry cycle whereas things may currently be topping out – especially if Brexit undermines confidence in higher-priced housing regions.  

Crest's finance director has just resigned and prudent caution after years of prosperity in the housing market – benefiting from the exceptional stimulus of ultra-low mortgage rates and Help to Buy, is to await any new broom's write-downs.  

Enterprising investors may, however, prefer to trust Crest proclaiming a £1.6 billion gross margin in its short-term land pipeline at a time when some downside to published NAV may result in due course - the stock has de-rated roughly to this level anyway, thus making Crest a bid target as a means to enhance a predator's own land reserves.

Brexit uncertainties mean an opportunistic bidder could probably get control by offering shareholders a moderate premium, and integrate the assets so to be well positioned for the next up-cycle.  

Otherwise, the choice is to wait for share prices more generally to retreat below published NAV's, which may take a year or more before such an initiative could even start.  This is all highly speculative, but so is trying to get any objective grasp on housebuilder/property company asset values right now, or the extent they have benefited from general asset inflation amid monetary stimulus since 2009.

Housebuilder bosses have been recent net sellers

A sense not to push one's luck too far, with all such help from Conservative governments and the Bank of England, is shown by directors cashing in over £300 million worth of shares – the chairman and chief executive of Berkeley Group, similarly geared to London and the South, accounting for a third of this.  

Indeed, Crest's current executive chairman sold over £1.2 million worth of shares at 483p last April, having also exercised shares options in March and sold all those shares arising, at 475p, thus exacting £1.1 million further cash. His 2017 total remuneration was nearly £2.3 million relative to a current holding around 4.4 million shares.  

High pay may help directors take a gung-ho approach to share dealing, but he could simply have taken the view Crest's price got over-cooked in springtime but now has been dealt too heavy a blow. 

A speculative if small-scale buy

The stock's plunge to published tangible net asset value, a double-digit yield backed by a defensive re-focus on cash generation, justifies speculative interest this being the kind of market value you'd expect at the lower turning point of the industry/economic cycle, than the top.  

That means Crest is no tuck-away, holders must keep tabs on an industry liable to be at the early stage of slowdown, and the UK could be headed for constitutional crisis if the EU won't budge on the Northern Ireland border issue and Parliament won't approve a no-deal Brexit.  

There's an off-chance of a further lurch down in values, this time on an underlying basis besides market price.  Such a stock should be minor in portfolio context.  Speculative buy

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

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