Housebuilder Crest Nicholson (LSE: CRST) issued a profit warning Thursday. The shares dipped 10% when the markets opened — though they’ve recovered a couple of percent at the time of writing.
In a full-year trading update, the company told us that in the second half it had “experienced a volatile sales environment in some of its regional businesses, driven largely by ongoing customer uncertainty relating to Brexit and the economic outlook in the UK.”
As a result, pre-tax profit expectations for the full year have been cut to the £120m-130m range, down from the £150m predicted by analysts. That marks a significant two-year drop from the £207m recorded in 2017.
The problems have mostly affected some of the firm’s legacy London sites, which will take a £10m valuation hit, and compliance with tightened post-Grenfell fire regulations is set to cost around £17m.
Downturn?
Is this the long-feared precedent for a downturn in the UK’s housebuilding sector? I don’t think so. Crest Nicholson’s problems seem very specific, and the firm had suffered an earnings fall in 2018 and was already in line for a further drop this year.
Should you go against Thursday’s crowd and buy the shares? If EPS drops from current forecasts, in line with the expected profit shortfall, we’d still be looking at shares on a forward P/E of 9.5 on the fallen share price, and I don’t see that as stretching.
The dividend, which had been predicted at 7.9%, could well come under pressure as cover would dip. But even then, there’s plenty of room for a cut while still maintaining a healthy yield. I see no need for panic.
No contagion
Shortly after the markets opened, you could have been forgiven for thinking the contagion was spreading across the whole of the sector, as Taylor Wimpey (LSE: TW) shares dipped 2.8%. But they quickly recovered, presumably as investors digested the reasons for the Crest Nicholson drop and, as I write, they’re pretty much unchanged on the day.
The much larger Taylor Wimpey, with its wider geographic spread, hasn’t suffered the same pressures as Crest Nicholson, whose focus is on London and the South. Instead of falling profits as the big housebuilder growth boom came to its inevitable conclusion, Taylor Wimpey has enjoyed a considerably softer landing.
Earnings growth slowed to 5% last year, there’s a 5% fall on the cards for this year, and analysts are expecting a 2% increase in 2020. Essentially, earnings have just flattened, and I think that’s way better than the worst Brexit-led fears for a housing slump were suggesting.
Even cheaper
Even with those positive comparatives, Taylor Wimpey shares are on an even lower forward valuation than Crest Nicholson’s, with a P/E of only 8.2. Dividend yields are bigger too, with a total of 10.8% on the cards this year — though that does include special dividends.
And Taylor Wimpey’s performance? July’s first-half update gave me no cause for concern, with home completions up from 6,497 a year previously, to 6,541, and CEO Pete Redfern speaking of “a record sales rate” and “strong customer demand for our homes in a stable market.”
Sure, the housebuilding boom might have ended and we could well be set for a few flat post-Brexit years. But you don’t need growth to make a profit, you just need steady cash generation.
