Interactive Investor

Stockwatch: this housebuilder’s discount and dividend are attractive

4th July 2023 10:19

by Edmond Jackson from interactive investor

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Housing stocks have slumped, but a dividend yield of at least 7% and significant discount to net asset value have grabbed the attention of analyst Edmond Jackson.

An attractive investment 600

Is a stonking discount to net tangible assets sufficient reason to accumulate a housebuilding stock, despite higher mortgage rates potentially weighing on house sales for two years?  

The sector fell 11% last month after a 9% decline in May when expectations for rising rates renewed slowdown fears in UK housing. 

Amid weak sentiment, most housebuilding equities trade around or below tangible net asset value, for example Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) – the latter at a near 20% discount.  

Yet at 188p, mid-cap Crest Nicholson Holdings (LSE:CRST) has fallen as far as a 43% discount to 330p per share, which begs the question, might a housing recession be (overly) priced in? 

The stock is effectively bumping along recent-year lows of 183p last September and traded either side of 170p in March and September 2020. In between, and showing how sentiment can twitch in this sector, Crest topped 450p in May 2021.  

Its best rally was from 260p in 2013 when Help to Buy was first introduced, reaching 630p in May 2017. This emphasises the impact of stimulus measures and very low interest rates. 

From current prices, however, it is not necessary to repeat anything like such rallies to achieve useful gains. 

Shifting expectations on the UK economy and housing   

The key question is what extent the UK economy may slow, compromising homebuyers. There is a real risk of being trapped in “stagflation”, where interest rates stay higher for longer and people do start to lose their jobs – versus strong employment now. 

More positively, housebuilders are a lot better financed than in past recessions, with scant debt and even net cash. From the bellwethers again: Persimmon has around £862 million net cash and Taylor Wimpey £837 million. While Crest’s cash-at-bank has fallen 40% year-on-year to £164 million, there is an overall £67 million net cash position relative to stable long-term debt of £97 million. 

It may only need economic expectations to twitch to “less worse” for their share prices to rise, as prime cyclical stocks with useful yields.  

At some point the stock market will anyway try to anticipate economic recovery, with housebuilders among the leaders. Their best years for stock performance are likely over, along with ultra-low interest rates, yet a fundamental shortage of UK housing remains. 

Free cash flow profiles are strong given little need for capital expenditure, which begets useful dividends. Crest paid out 33p a share in respect of its October 2017 and 2018 years, equating to a near 18% yield at the current market price.  

Crest’s dividend is expected to fall from 17p in the October 2022 year, to around 15p this year and 13p in 2024, where it would yield 8%, easing to 7%. If realistic, then it is already a prop for the equity. Earnings cover might only be a modest 1.4 times, yet cash flow could be higher and is what matters for dividends. 

On basic criteria of assets and yield, the sell-off to 188p therefore looks savage, inviting closer examination. 

Crest Nicholson Holdings - financial summary
Year-end 31 Oct

201720182019202020212022
Revenue (£ million)1,0431,1211,086678787914
Operating margin (%)20.316.210.5-0.312.04.1
Operating profit (£m)212182115-2.394.337.4
Net profit (£m)16913782.5-10.770.926.4
Reported EPS (p)65.153.032.1-4.227.510.2
Normalised EPS (p)65.153.041.923.537.360.0
Operating cashflow/share (p)9.024.248.744.549.120.1
Capital expenditure/share (p)1.01.01.50.10.10.0
Free cashflow/share (p)8.023.247.244.449.020.1
Dividend/share (p)33.033.011.20.013.617.0
Earnings cover (x)2.01.62.90.02.00.6
Return on capital (%)19.815.39.9-0.28.33.4
Cash (£m)179188172240352375
Net debt (£m)-36.7-17.4-38.2-136-249-274
Net asset value (£m)818873854825902883
Net asset value/share (p)320340333321351344

Source: historic company REFS and company accounts

Interim numbers down yet substantial land bank is attractive 

This company last updated a month ago - interims to 30 April – with revenue down 22%, normalised operating profit down 54% and similarly pre-tax profit down 60% to £21 million. Operational slowing was reflected in home completions down 18%. 

It shows how profits tend to swing more dramatically than revenue – it’s called “operational gearing” – another reason the stock market frets. 

As for the principal aspect of assets: note 10 to April’s balance sheet shows £1,108 million inventories; overwhelmingly, £1,022 million work-in-progress, which appears to include the land bank.  

Management describes the market in land as “highly competitive for the foreseeable future” which appears to mitigate risk of asset write-downs, hence the market is starting to price in a worst-case scenario. 

While initially frustrating, the aspect of land bank is not quantified, the operating and strategic review cites a near-term land portfolio of 15,011 plots and a strategic one of 22,461, with a gross development value of £12.5 billion.  

There is scope for subjectivity in that figure and a house price recession to reduce it; yet such a land bank is manifestly substantive.  

Crest’s orientation to central and south-east England also means land availability is tight in some areas, with quite a battle for planning permission, hence supportive for land values. 

There are only modest £29 million intangibles on the balance sheet in context of £877 million net assets, which also implies organic growth than swelling the balance sheet with goodwill from serial acquisitions. 

While it can look as if a low share price versus the asset base raises the odds of a takeover, any offer would need to respect land reserves. Having to pay a fair price amid the current extent of uncertainty may discourage rivals from big strategic moves – at least for now.  

Outlook statement offers hope after tough first half-year 

Management cites a particularly uncertain period after last September’s mini-budget, then the cost-of-living crisis getting underway and now a run of interest rate rises. 

Confidence is said to be returning as an ongoing lack of UK housing supports prices, as does rental inflation (which feeds back to demand for homes to buy). 

But you could say the effects of higher mortgage costs – which may not have peaked – are yet to be felt by home-buyers, and the new situation may persist. 

Crest acknowledges the cessation of Help to Buy is compromising first-time buyers. I would treat that seriously given they are a vital foundation of the housing market. They may also be relatively more exposed to higher living costs as they raise families - witness growing examples of “the bank of mum and dad” subsidising home purchases. 

Crest continues to speak with government on planning matters and renewing support for first-time buyers. Whether that happens is a tough call now the prime minister and chancellor speak of “doing the right thing” fiscally rather than resort to more public debt. Quite whether they capitulate to offer sweeteners as the general election (by 28 January 2025) approaches is unclear. 

The Tories have a strong track record on boosting home ownership, to reinforce appeal to their core voters; yet 2017 research by Morgan Stanley revealed that Help to Buy mainly inflated house prices to the benefit of builders’ profits. 

It means the stock market is likely hard-wired to any new, first-time buyer assistance – a speculative yet pertinent matter that should also be considered. 

As yet, Crest management affirms expectations for near-£74 million adjusted pre-tax profit in the full year to 31 October. This translates into earnings per share (EPS) of around 21p, albeit with 18p as consensus for October 2025, hence a forward price/earnings (PE) ratio of 10 times.  

While this can look fair pricing for uncertain prospects, I find the assets discount and likely material yield (barring a worst-case scenario) tilt towards a case for averaging in. Buy. 

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

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