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Crest Nicholson's dividend under threat as it warns on margins

A subdued housing market is hurting Crest Nicholson's ability to sell some of its pricier units
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Debt at the halfway point of the financial year had risen to £77.5mln from £34.5mln the year before

Crest Nicholson Holdings PLC (LON:CRST) proved house-builders can make disappointing trading updates as its shares slumped on a warning about operating margins.

The shares were off almost 13% at 431p after the company said in a trading update covering the six months to the end of April that operating margins would be around the bottom end of its 18-20% guidance range.

READ: Crest Nicholson says trading environment continues to be "generally robust"

The company said that margins had been depressed by a generally flat pricing environment against a backdrop of continuing cost inflation of 3-4%.

On the bright side, forward sales for the 2018 year including year-to-date completions are 11% ahead of the same period last year. Overall, Crest Nicholson expects growth in reported revenues for the year to be in excess of 15%.

The builder said that most of its sales outlets have been performing well but sales at higher price points have proved to be more difficult to achieve, thanks to a subdued second-hand market.

In the first half of its financial year, unit completions rose 17.6% to 1,251 from 1,064 the year before while the average selling price rose 5.0% to £439,000 from £418,000. Crest Nicholson said the rise in the average selling price was largely due to changes in product and location mix, and that this was expected to represent a peak level for the business.

Forward sales in the period rose 5.3% to 2,079 units from 1,975 units the previous year, or by 6.3% in value terms to £441.7mln from £415.6mln.

Subdued market for previously owned homes is weighing on the new build market

“Sales at higher price points will continue to be impacted by a slow second-hand market and this is likely to restrain overall price growth in the near term. As a result, margins for next year are expected to be at a similar level to this year,” the company said.

"The group has delivered a good sales performance in the first half of the year. The business continues to increase the number of homes built and carries positive momentum into the second half of 2018, with steady outlet growth and higher forward sales,” said Patrick Bergin, the chief executive officer of Crest Nicholson.

“Flat pricing has had a negative impact on margins, but volumes in the new build housing market continue to be robust and Crest Nicholson remains well positioned to grow volumes and deliver the homes that the UK needs while continuing to focus on delivering strong returns for shareholders," he added.

Shore Capital has its rating for the shares under review following this morning’s warning.

“The board is guiding to full year EBIT [earnings before interest and tax] margins of 18% against ours and consensus of above 19%. The guidance also suggests that EBIT margins for next year will be at a similar level. The reason for the slippage is one that we have been highlighting for some time – the under-recovery of build cost inflation, an issue that the house builders have suggested is not a problem, yet at least, because prices were still rising enough to recover this. We had expected this to become an issue but only from CY2019 so this is a shock,” Shore admitted.

“Crest is making comments about pricing being more difficult at its generally slightly higher price point than that of other house builders (average price for open market sales is £439k versus something in the high £200k range for most other house builders not Crest does have a heavy southern bias) and sells more to those who are also selling a house in the second hand market – very few sales are to first time buyers where help to buy has its greatest impact; however, it would be wrong to think that this drag from the existing homes market and the inability to under-recovery costs is a problem unique to Crest,” Shore cautioned.

The broker sees pricing pressures as an emerging issue for the whole sector. Broker forecasts will have to be lowered, it warned, adding that the decline in margin to 18% suggests a reduction in the profit before tax (PBT) forecast from around £226mln to something closer to £210mln.

Is the Crest Nicholson dividend under threat?

“As Crest is paying a dividend driven by EPS cover, the distribution could be expected to fall in line with PBT unless the board re-writes the policy and allows cover to drop below 2x or begins to prescribe dividend levels,” Shore added.

Russ Mould, the investment director at AJ Bell, also speculates about the dividend.

“Lower levels of profitability could have implications for future dividends if the margin trend worsens,” Mould said.

Mike van Dulken, the head of research at Accendo Markets, wondered whether this morning’s warning is only the thin end of the wedge.

“With half the year still to go, the risk is that even downwardly revised guidance proves wishful thinking, should the second half prove even tougher for both pricing and costs. Especially with official property price growth data suggesting continued softening of the market amid uncertainty about Brexit, weak UK growth/inflation and muddled messages on interest rates from the Bank of England,” he commented.

“If market inertia builds further and costs can’t be controlled, the company could be set for a big squeeze, hot on the heels of the UK’s big freeze,” he added.

--- adds comments from brokers and talking heads ---

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