I’ve owned Crest Nicholson (LSE:CRST) shares for more than half a decade. And it’s my worst-performing stock by a long way. But I see it mainly as an unrealised loss for now as I don’t plan to use the money in my Stocks and Shares ISA.
However, I saw a note from Berenberg last month and thought it might be worth paying Crest a little more attention. Here’s why.
Valuation
Crest Nicholson trades at around 3.9 times 2022 earnings. However, the issue is that the housebuilder isn’t going to perform as well in 2023. Profit before tax is now expected to come in at £50m for the year to 31 October, a 30% cut on previous guidance and down from £138m the previous year.
Currently, the housebuilder, which has predominantly focused its operations on the South of England, trades at 11 times expected earnings.
Commenting on the valuation, brokerage Berenberg said: “This leaves the group, even on significantly downgraded forecasts, as the most lowly rated housebuilder in the peer group, and we think this asset-backed valuation is very compelling.”
Moreover, we can also see that Crest is currently trading at around 0.5 times tangible net asset value. In other words, the assets it owns are worth double the company’s valuation. This is a highly compelling metric.
And looking around, it’s hard to find many housebuilder stocks cheaper.
Will conditions improve?
It’s great when we find a stock that appears cheap. But sometimes these companies are falling for good reason, and they may have further to fall.
So, what about Crest? Will its performance recover and will things become easier for builders?
Well, it’s unusual to see a company so open about the issues generated by higher interest rates, the end of the help-to-buy scheme, and “economic uncertainty arising from the September 2022 mini-budget.”
Housebuilders had become heavily reliant on government schemes in recent years. Crest, at least from my own experiences with the company, appeared to have a strategy geared towards the upper price boundaries of the scheme — £450k outside London, and £600k within it.
This is certainly a concern. After all, the help-to-buy scheme provided so many first-time buyers with what was essentially a deposit contribution.
Analysts have been revising their forecasts down for the firm, with earnings per share (EPS) expected at 16.3p in 2023, 13.5p in 2024, and 18.2p in 2025. However, these forecasts have been changing wildly over the past year.
Personally, I see more positives in 2024 with interest rates stabilising — some of the forecasts included in the above consensus EPS are already outdated. After all, there’s an acute shortage of houses in the UK and Britons won’t wait forever to move.
Dividends
If I were to look at Crest Nicholson on the Hargreaves Lansdown platform, it would tell me that the firm is offering a 9.9% dividend yield. That’s one of the highest yields on the FTSE 250.
However, with analysts forecasting EPS to come in around 16.3p in 2023, it seems unlikely that Crest will maintain its stated dividend from 2022 — 17p which was covered 2.5 times by earnings.
Nonetheless, I still hold a positive outlook on the firm, especially from the current share price. In fact, I’m tempted to increase my position.
