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Crest Nicholson shows housebuilders are still rollin', rollin', rollin' DOWN

By Chris Bailey | Tuesday 12 June 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.

A month ago, I wrote a piece about housebuilders generally and Crest Nicholson (CRST) specifically, which concluded with the observation: "Lower prices and lower margins...that's the way forward for housebuilders. Sell 'em all". Today's formal half year numbers from Crest fully reiterate this clear theme...

…and takes it much further, with the company now also noting that its 'strategy to sustain margins on higher-priced properties requires slower sales rate – no longer targeting £1.4 billion of revenue for FY19...Business actions to protect margins already underway'. Oops. You can see the squeeze occurring in the published numbers already with half yearly revenues up a headline impressive 13% but operating profit up just 1% year-on-year and the dividend being flat.

I think what bodes poorly for the company is that the dramas so far have been in properties of £1 million+ but a 'Portfolio strategy shifts towards units below £600k' highlights it knows that exposed underbelly of expensive outside London houses valued between £600k-1m is super exposed too as especially the London negative ripple effect plays out. Hence the comment it will 'close the Central London office and re-open a South-East division, based in Kent, from October 2018'. London is never is just bloomin' expensive on income multiples.

Of course with the UK average now up to a mere six times income, house prices generally are hardly value territory even with the benefits of low interest rates, which cannot be sustained forever. Additionally - and despite some broader strategic underpinnings for the housing market including an antiquated planning system and a rising domestic population / number of households - Crest moving down market brings them into the competitive zone of names like Bellway (BWY), which also updated the market today.

What I found most interesting about Bellway's observations was that even it said that 'demand for large and high value homes is a little slower'. the general burgeoning property market angst. Certainly it is managing all this much better but is clearly not immune from a generalised slowdown. I note it also said that 39% of completions were linked to Help to Buy, a government initiative which certainly has boosted the housing market over the last few years. The trouble is subsidy and help can only aid for so long a market that simply is suffering from too high underlying house prices. Take a look again at the graphic in the link in the first paragraph. There's still only one conclusion on the housebuilders from a reasonable total return perspective for the next year or two: sell 'em all.

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