The rampant investor demand we saw for Britain’s listed housebuilders in 2017 has still failed to materialise in 2018 as fears over the housing market have gathered pace.
Take Crest Nicholson Holdings (LSE: CRST), for example. The FTSE 250 business saw its share price swell more than 20% last year as predictions that the housing market would collapse in the wake of the EU referendum fell flat.
However, signs that the slowdown in the property market is worsening have seen Crest Nicholson erasing all of the gains it had made since the beginning of 2017. And a poorly-received trading update last week caused investors to flee en masse, causing its market value to fall by double-digit percentages on the day.
There is no doubt that the earnings outlook has become a lot less assured for the housing specialists of late. Still, I believe that share price weakness over at the likes of Crest Nicholson represents a brilliant buying opportunity as the long-term profits picture remains largely robust.
It’s not all bad
In its latest trading release it said that thanks to a combination of flat homes prices and building cost inflation running at 3% to 4%, margins for the full year would clock in at around 18%. This is at the lower end of its target ranging between 18% and 20%.
Crest Nicholson also advised that “sales at higher price points have proved to be more difficult to achieve,” caused by “the greater interdependency of higher-value sales with transactions in the second-hand market where activity has been more subdued and property chains have been taking longer to complete.”
It was obvious that the impact of economic and political uncertainty on the property market would cause earnings at the likes of Crest Nicholson to take a whack as buyer demand moderates. However, first-time buyer appetite is still strong enough to keep profits at Britain’s builders afloat, and this is likely to remain the case on the back of supportive mortgage rates and the government’s Help To Buy scheme.
Crest Nicholson underlined this theme last week when it advised that forward sales for 2018 (including year-to-date completions) were up 11% from the corresponding period last year, reinforcing its prediction of a 15% year-on-year revenues improvement.
Simply put, Britain’s shortage of housing stock continues to drive demand for newly-erected properties. And with population growth likely to keep outstripping build rates due to ongoing government inaction, I am backing Crest Nicholson to still deliver solid shareholder rewards over a longer time horizon.
Look at those yields!
My optimism is backed up by City analysts who expect it to rebound from an anticipated 2% earnings fall in the fiscal period to October 2018 with a 12% jump next year. Margins may be under pressure at the moment, but in the long term these will recover once buyer appetite eventually improves.
And these estimates lead to predictions of further meaty increases in the annual dividend. Crest Nicholson — which has raised payouts fivefold during the past five years — is expected to increase last year’s reward of 33p per share to 33.3p in the current period and again to 37.3p in fiscal 2019.
These figures yield 7.5% and 8.4% respectively. When you combine this with the company’s ultra-low valuation, its forward P/E ratio standing at 6.8 times right now, I reckon the builder is a very attractive income share to buy today.
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