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Quelle surprise: housebuilder Crest Nicholson warns about margins!

By Chris Bailey | Wednesday 16 May 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I do not think I have formally written about the housebuilders before but I know they are beloved by many investors out there citing yield, cash back to investors, an inherent shortage of housing and other attributes probably including their ability to walk on water. Any hopes of God-given capabilities have come crashing down to earth today though with an update from Crest Nicholson (CRST), shares in which have fallen another 13% to a new 12 month low. So what did it say? Here's the key excerpt from today's update:

'sustaining sales volumes in a generally flat pricing environment...against a backdrop of continuing build cost inflation at 3-4% will mean that operating margins for the full year are expected to be around 18%, at the bottom end of our 18-20% guided range'

Oops. I really am not that surprised though. The trouble is the housing market is seizing up as finally the huge multiples of prices to underlying incomes starts to bite led by our glorious capital and progressively fanning out over large swathes of the country. That's not good...and so hello crimped margins and a falling share price. Just remind me dividend munchers how many years worth of dividends the share price compression over the last 12 months has cost you?

Based on observing the last few cycles, the key with valuing housebuilders is to think about the direction of travel and not the shorter-term numbers per se. I do agree that the sector is better positioned than in previous times with better balance sheets and the like. However the housing market is a cruel mistress. In short, until the hope that the prospective housing market is going to get better, forget housebuilder shares. Don't be shy in taking profits if you have them still and exiting the space.

And how does the housing market get better? Well either prices go down or incomes go up, in short. The lunacy of where we are at the moment was wonderfully captured in a graphic at yesterday's Taylor Wimpey (TW.) capital market day. After a whole load of waffle about positioning and strategy, the key chart of the 90+ showed was one which went through a couple of scenarios on affordability. You can tell by the title 'With or without Help to Buy, they face a challenge' it is a dodgy chart for the housebuilders.

Hopefully the clever boffins behind the scenes at ShareProphets can include it below (they can!) but - suffice to say - when you have a couple profiled who between them are earning a stonking £55k a year and are struggling to buy a ain't a sustainable housing market. Lower prices and lower margins...that's the way forward for housebuilders. Sell 'em all.

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