A Tale of Two Housebuilders: Crest Nicholson and McCarthy & Stone
Prologue: ‘A Tale of Two Cities’ by Charles Dickens is regularly cited as the best-selling novel of all time (200 million or so at the last count); and it has been mimicked and copied many times. In Week 5, it was the UK housebuilders turn with the pair-with-two names, Crest Nicholson and McCarthy & Stone, both reporting final results. And, just as Dickens juxtaposed the best of London and worst of Paris, Crest Nicholson’s share price rose 12.2% whilst McCarthy & Stone fell 5.7%. Neither contained particularly rosy empiricism about fiscal 2019 but Crest’s future script was the more compulsive. This is despite the fact that McCarthy used the word strategy or strategic 53 times (note, too, its largest shareholder sold a third of its holding on Wednesday). By contrast, Crest’s Peter Truscott’s scripted ‘A Golden Thread’ (Book the Second from Dickens’ Tale) of aspiration and numbers: “we will rebuild trust in our performance” and there is an “embedded” gross profit of some ￡1.3 billion in the land bank. In other news, the first month of 2020 saw the Sector rise 10% and whilst it closed off its peak, it broke new ground seven times in the month. Next chapter, next week with six new characters.
The UK Housebuilding Sector paused for breath and a Coronavirus vaccination in Week 5 (minus 1.4%/￡731 million) which means it is also 1.4% off the top; albeit January was still up 10.2%. Best of the Week was Crest (+12.2%) and worst Cairn, Inland and McCarthy & Stone (all minus circa 6%).
The GANG-of-FOUR are the land improvers and hybrids, but none less worthy. For them, too, Week 5 was a mixed development with Urban & Civic (AGM in Week 6) rising 1.4% with tacit support from Harworth (+0.3%) whilst Boot was down at heel (minus 0.9%), as was St Modwen.
UK Finance: the number of new mortgages advanced by the high street banks (some two-thirds of the market) rose 8.1% in 2019 to 507,769 whilst re-mortgages were up 8.0% at 367,590. Note, too, that these numbers included the month of December which showed respective growth of 24% and 31% respectively versus December 2018. The Boris bounce encore? Overall, too, the value of mortgages advance by the banks was up 4.7% at ￡172 billion in 2019 versus 2018 with the value of advances in the total market off by 3.8%. Go figure.
Bank of England: the number of new mortgages in the UK last year rose 1.0% to 789,230 according to BoE data (see above for the high street banks). At the same time, re-mortgages rose 0.8% to 587,591. December 2019 versus December 2018 was better with new loans up 4.6% and re-mortgages up 3.1%.
Residential transactions in the UK in December last year (104,670) were 6.2% higher than November and 6.8% higher than December 2018.
Nationwide recorded a 14-month high in January with +1.9% annualised in UK house price inflation (December: 1.4%) to ￡215,897. Prices in the month also rose by 0.5%, whilst in the January Quarter the rise was +0.8%. “Much will continue to depend on how quickly uncertainty about the UK’s future trading relationships lifts, as well as the outlook for global growth. Overall, we expect the economy to continue to expand at a modest pace in 2020, with house prices remaining broadly flat over the next 12 months”. Pantheon Macroeconomics, however said indicators of demand at the very start of the home-buying process are red hot. “We think the pick-up in demand can be sustained this year by the continuation of low mortgage rates and solid wage growth, driving prices up by about 4%”.
Home ownership: The latest English Housing Survey showed a slight uptick in the home ownership rate in 2019 from 63.5% to 63.8% year-on-year.
Crest Nicholson: when you deliver bad news and your share price rises 7.5% on the day (to 472.6 pence), you are doing something right. And, so it is with new broom CEO Peter Truscott. Indeed, he alerted the market that all was not well a matter of days after sitting down at his new desk back in September (for the record, too, Peter hails from Galliford Try). He has now comprehensively delivered these messages i.e. ‘step two’; and, with his next stride, Peter talked about the prospective odyssey to the sunlit uplands of 2022.
In the year to 31 October, total revenue was off 3% at ￡1.09 billion with unit completions also down (by 4.5%) to 2,912 - comprising open market completions of 2,171 (minus 8%) and affordable of 741 (+9.5%). For the record, too, the open market ASP was 2.0% lower at ￡388,000.
Turning, to EBIT it fell 27% to ￡133 million (pre-exceptionals but net-of-a-￡3.4-million impairment charge). Unsurprisingly, profitability followed, with a drop from 16.1% to 12.2%. Next, adjusted profit before tax was ￡121.1 million (or ￡102.7 million net of exceptionals) which was down 28%. EPS pretty much followed suit although the dividend was maintained at 33 pence with cover falling from 1.62 to 1.15x.
In terms of the balance sheet, adjusted ROCE was just 13.5% (2018: 17.8%) although Capital Turn, on the same basis, was sustained at 1.1x. There was also ￡37.2 million of net cash, up from ￡14.1million last time.
A new three-year strategy has been enacted too with an emphasis on reputation, quality, value, efficiency and a range of good citizen aspirations. Crest says “we will rebuild trust in our performance”. It also quantified this with a range of financial targets running out to fiscal 2022:
· unit completions to increase to 3,500 units (2019: 2,912) split 60% private, 20% to 25% affordable and 15% to 20% bulk purchase;
· outlets to grow to a minimum of 70 (2019: 59);
· administrative expenses to be 5% of sales (2019: 6.0%);
· adjusted operating profit margin up by a minimum of 250 basis points (2019: 12.2%);
· ROCE to a minimum of 20% (2019: 13.5%) with a focus in cash and allocation of capital; and
· A maintained dividend of 33 pence this year and then plus RPI from fiscal 2021.
Note, too, that Crest holds a 16,960 plot short-term landbank (5.8 years supply) plus 20,169 strategic plots; and it estimated that the short-term landbank has a GDV of ￡5.41 billion and an embedded gross profit of some ￡1.3 billion; which implies an estimated gross margin of 24.0% (2019: 18.7%).
Then, in terms of outlook, forward sales at mid-January were down 22% at ￡503.5 million but with a brave face. “We believe the decisive political outcome should provide support for the sector in the near term. While it is too early to form a view on the impact for fiscal 2020 trading, we are seeing some encouraging signs. Footfall and visitor numbers on our developments have increased and traffic on our website is up. We remain confident in our ability to deliver on our previous guidance and re-iterate our expectations for fiscal 2020 adjusted profit before tax at ￡110 to ￡120 million (￡121.1 million)”. The shares rose 12.2% in Week 5 to close at ￡5.
Crest Nicholson [2]: Deputy Chair/Senior NED Leslie Van de Walle (incumbent since January 2018) will step down at the AGM on 24 March. Continuing NED Octavia Morley will now be Senior.
Crest Nicholson [3]: Barclays has joined HSBC as joint corporate brokers and financial advisers.
McCarthy & Stone: if I tell you that the words “strategy” and “strategic” appeared 53 times in its final results announcement, you get the picture. Equally illustrative, “solid” appeared eight times in reference to the Group’s results and “challenging” on 11 occasions - to do with the market - in this 8,051-word communication (net of risk analysis and tables). Note, too, there was at least one typo and a number of inconsistent spellings too. In response the shares added just 1.2% to 155.7 pence, which was followed next day by the sale of 8% of McCarthy by its largest shareholder (see over).
McCarthy & Stone also shifted its year-end from end-August to end-October which meant that the latest numbers covered 14 months versus 12. But even then, with two extra months, they were not too flash. Legal completions nudged up 8% to 2,301 million with an ASP of ￡308,000 (+3%). Underlying operating profit was pretty much flat at ￡68.1 million for the 14 months of fiscal 2019 versus ￡67.5 million over 12 in fiscal 2018. Unsurprisingly, profitability drifted from 10.1% to 9.4% (the Group’s target is ‘greater than 15%’). However, the 2019 operating profit included a maiden ￡5.9 million (2018: zero) revaluation uplift related to rental units (and without it, 2019’s margin was 8.6%).
Underlying profit before tax, ex-brand amortisation and a ￡17.3 million exceptional restructuring debit (2018: ￡2 million), came in 2% higher at ￡63.1 million versus ￡62.1 million; albeit on a pro-rata monthly basis it was down 19%. Earnings were also flat with the dividend unchanged at 5.4 pence; and underlying cover of 1.8x (2018: 1.7x). Note, too, it is the Board’s intention to grow the ordinary dividend cover to around 2x earnings over the medium term.
Turning to the balance sheet, it sports ￡27.1 million of net cash (2018; net cash of just ￡5.6 million) with our adjusted ROCE at 9.6% - and although paltry it was up from 9.0% in 2018 (the Group’s target is also ‘greater than 15%’). For the record, too, adjusted Capital Turn was 1.0x (2018: 0.9x).
CEO John Tonkiss said: “the Group’s new strategy has driven a solid FY19 trading performance in a difficult market. We have a strong balance sheet, a continued focus on delivery of operational improvements across our business and an ongoing commitment to delivering high quality developments and five-star customer satisfaction. We are also making excellent progress across our key strategic initiatives as set out in September 2018, particularly rental, where our initial pilots have confirmed strong demand for renting in later life. This is a hugely positive step for the business as it enables our business model to become more resilient and ensures we are in a strong position to capitalise on future market recovery”.
In terms of outlook, there was no order-book data forthcoming. However, total volume expectations remain unchanged at circa 2,100 (2019: 2,301) at an ASP of ￡300,000 (2019: ￡308,000). Also, an increased proportion of its targeted volume is expected to come from rental offerings. This means that a proportion of the Group’s balance sheet will continue to be allocated to rental until an investment partner is secured. For the record, too, house price inflation is expected to remain subdued with build cost inflation at circa 3 to 4%. There will also be further exceptional costs of ￡6 million to do with the new strategy (although not all in the current year). Full year 2020 results remain in line with market expectations but the first half will be lower.
McCarthy & Stone is the nation’s largest retirement housebuilder and the catchment is burgeoning i.e. ONS says the number of people aged 65-or-over will rise by 43% to 17.4 million and those aged 85-or-over is set to rise 86% to three million by 2043. And, yet, just circa 8,000 new retirement units came to the market across all tenures in 2019 against an estimated demand of up to 30,000 units per year, according to EAC (2019) and Knight Frank (2016) reports. Can the Group join the dots? In any event, the shares closed Week 5 off 5.7% at 147.4 pence and they are one-of-only-two Sector stocks to be negative in 2020 so far (the other one is Cairn).
Inland Homes: back in October, Inland said its final figures would appear in January; and, they did, on the final day of the month. Other companies give an actual date for announcing numbers. Okay, Inland will say they couldn’t this time because it the Company’s year-end moved from 30 June to 30 September. But then, McCarthy & Stone (see above) moved its year-end and still committed to a reporting date well in advance.
As to the numbers, revenue was barely changed at ￡147.9 million against ￡147.4 million; and remember this is 15 months plays 12. Profit before tax was some 30% better at ￡25.0 million but this included, in the latest period, a ￡12.6 million profit on a JV sale in Cheshunt (2018: 0); and without it profit before tax would have declined 36%. Inland, however, chooses to measure its performance by EPRA asset valuations and, here, the EPRA NAV per share rose 11.2% to 113.7 pence. The Company also raised its total dividend by 41% to 3.1 pence which was covered 2.5x by stated EPS (2018: 3.6x). However, Inland paid less than 2% tax in this latest 15-month period.
In terms of the balance, we put ROCE still in single digits i.e. 9.0% versus 8.6% last time. Note, too, that net debt is at ￡152.3 million or 94% of net assets (2018: ￡142.4 million and 56%) although “this is expected to fall as a number of realisations are achieved”.
Turning to trading, Inland’s land bank is at a record 7,795 (2018: 6,870) including major schemes in Buckinghamshire and Hertfordshire. However, only 38% of the land bank has planning permission.
At the same time private house completions were down by a quarter at 202 (with its ASP off 15% to ￡250,000). However, Inland has “892 homes under construction”. Land sales were also sharply lower (i.e. minus 31%) at 577 plots. However, in Partnerships housing, revenue has ballooned from ￡12 million to almost ￡63 million and here it has 921 homes currently under construction (2018: 220).
Chairman Terry Roydon said: “We have some very lucrative land opportunities in the pipeline which we are seeking to acquire with a capital light structure, in which the bulk of the capital is provided by investors. This will increasingly be a strategic focus for the Group”. That said, the shares dipped a 1.2% on the numbers and 5.8% in Week 5 to close at 84 pence; and this also means they are flat in 2020 so far.
Glenveagh hosted a CMD or Capital Markets Day in London on Thursday. Here it reiterated its message about increasing unit volume three-fold last year. The Group also expects the market environment to remain favourable with significant private and institutional demand for housing, particularly starter homes. The extent of the institutional demand for high quality residential product is such that the Group now expects to forward fund a series of Urban apartment developments. In turn, the Group's medium-term output targets have been increased for 2022, 2023 and 2024 to 2,350, 3,050 and 3,000 units respectively. CEO Stephen Garvey said: “We have now completed our net investment in land and, with the inherent opportunities in our business and underlying strengths of our organisation, I'm confident in our ability to deliver the significant ramp-up in volumes alongside maximising sustainable returns to our shareholders”.
ENABLE: The Government is to commence a ￡1 billion guarantee scheme to enable the release enough credit to allow smaller and middle-sized independent firms to begin delivering schemes, says Housing Secretary Robert Jenrick. The loans will be released through the British Business Bank’s ENABLE Build Programme with the support of Homes England. Local builders will be able secure loans from participating banks.
SHARES:
Henry Boot: now former CEO John Sutcliffe (as of 31 December) will continue as an advisor until the AGM in May when he will retire. In Week 5, however, he sold 1,362 shares at 328.7 pence which leave him with 692,825 shares (0.52%);
Cairn Homes bought 2.63 million shares at €1.2619 in Week 5 by way of its continuing buy-back of shares for cancellation (Week 4: 1.34 million shares an average €1.3391). Since 13 September last year, Cairn has bought back 26.8 million shares (3.39% of starting tally) and spent €32.7 million net. Plus, Coltrane Asset Management (Grand Cayman) 6.98% to 5.77% and Goldman Sachs 6.72% to 6.09% to 6.01%;
Crest Nicholson: Incumbent since 1 November, NE Chairman Iain Ferguson and Mrs Ferguson bought a maiden 35,000 shares at 462.5 pence; and
McCarthy & Stone: Anchorage Capital Master Offshore (Cayman Islands) 23.92% to 15.91%.
Epilogue: “It was the best of times, it was the worst of times……” - Charles Dickens
Tony Williams
02 February 2020
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