UK Edition
Her Majesty’s Government continues to throw everything it can at the housing market, from a holiday on stamp duty to extensions to the Help-to-Buy scheme, and the Prime Minister’s affirmation last month of a Conservative manifesto promise to offer young first-time buyers fixed-rate, long-term mortgages for up to 95pc of the property value.
Quite how the latter measure will function has yet to be made clear, although a government guarantee to the banks that actually make the loan seems the most likely mechanism.
Whether it makes economic sense is also unclear.
Demand for housing is not the problem, but the high cost of dwellings relative to incomes is. Trying to boost demand without a marked increase in supply does not therefore look likely to help solve the real issue at hand. However, the only thing investors can do is assess the policies and markets in front of them, not the ones that they want, and allocate their capital accordingly.
Assuming the policy is implemented, it could provide a further boost to house prices (albeit as a presumably unintended consequence) and that brings the FTSE 100 and FTSE 250’s legion of housebuilders into consideration.
There is no shortage of choice. But the one that perhaps has most to prove comes with a potentially attractive valuation and therefore has most to gain from any upturn in the housing (and stock) market: Crest Nicholson.
The company produced more than one disappointing profit update in 2018 and 2019 as its high-end, southern England business mix meant a lot of its properties were ineligible for the Help-to-Buy scheme. In addition, the Surrey-headquartered company’s operating margins had begun to lag those of its rivals by several percentage points.
As a reflection of the patchy operational and financial performance, the shares actually peaked in spring 2017, unlike those of most of its quoted building peers, such as Berkeley, Vistry or Barratt, among which fresh highs were commonplace as recently as January of this year.
To try to improve matters, the board brought in Peter Truscott, who had been the boss of Galliford Try and spent nearly two decades at Taylor Wimpey. He arrived in autumn 2019 and unveiled his three-year turnaround plan in January, although the pandemic and recession have since presented the company with a whole new range of challenges.
That brings us to where we are today. After their spring slump and initial rally, the shares trade no higher now than they did in April, and fresh gloom over the pandemic, the new lockdown and a retreat in leading economic indicators such as consumer confidence and purchasing managers’ indices may not help in the short term.
Nor are the results for the financial year that ended last week going to look particularly pretty when they are released in early 2021. A multiple of 17 times’ forecast earnings and a negligible yield, following the cancellation of the final dividend from last year and interim dividend from this one, do not immediately appeal either.
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But looks can be deceptive. Profits are depressed owing to the pandemic, the company is wisely conserving cash and the shares trade on a low-single-digit multiple of the past peak in earnings.
In addition, Crest Nicholson’s £559m market value compares with a last stated figure for shareholders’ funds on the balance sheet of £808m, so the shares trade at a discount to net asset value. That offers some degree of protection against share price falls and also potential for appreciation because housebuilders can trade towards twice their NAV at the peak of a cycle.
In addition, interest rates are not going up and further fiscal and monetary stimulus could yet see inflation rear its head, as ever-greater quantities of newly created or newly borrowed money chase a relatively finite supply of goods and services.
In such an environment “real” assets could be favoured by investors over “fiat” paper money, with residential property one of the available options.
It may be a bumpy ride but there could be some value on offer at Crest Nicholson for patient buyers.
Questor says: buy
Ticker: CRST
Share price at close: 217.6p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.