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Don’t bet the house on this builder

The Times

Changing tack before your hand is forced by activist investors is often reputationally prudent. Long-term sector laggard Crest Nicholson need only look at rival Countryside Properties, which said goodbye to its chairman after a hedge fund attack, for proof.

Ambitious growth targets and pledges to strip back costs and simplify operations has spurred a renewal in the FTSE 250 housebuilder’s share price after years of underperformance. Over the past 12 months shares in Crest Nicholson have generated the highest total return in the UK sector. That leaves the group’s market value nearing the same level as peers with superior margin and returns records — hardly compelling.

That share price growth is from a disappointing base: on a three and five-year basis, the group moves to the bottom of the leaderboard. Housebuilders thrive on throwing up houses at speed. Complex sites, with bespoke designs and mid and high-rise buildings meant costs higher and slower delivery of housing than its peers. Crest’s operating margins have typically been the weakest in the sector, at 12.2 per cent over the first half of the year.

That’s not to say the group hasn’t taken advantage of the cushy conditions laid down by the government for housebuilders. The weekly sales rate per outlet over the six months to the end of April improved to 0.69, from 0.46 pre-pandemic. But that was also off a lower operating margin than rivals as it continued to work through legacy sites, dimming the benefit to profits.

So why the new-found optimism? There are lofty targets set out by the chief executive, Peter Truscott, to drag the operating margin closer to the industry standard of between 18 and 20 per cent and generate a return on capital employed of 22 to 25 per cent by 2024.

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The plan to hit that margin target is by standardising the specification for the homes it is building, which it hopes will cut overheads and grow completion volumes more efficiently. More uniform designs means it is also sourcing from fewer suppliers.

Part of Crest’s problem was focusing too heavily on slower growth London, where sales price inflation has been stymied by the acute unaffordability of buying a home for so many. It has left central London but the new management is looking to expand north and east, opening new divisions in Yorkshire and East Anglia to tap into greater affordability and the government’s oft-cited but less tangible levelling-up agenda.

There’s a lot of sense in the strategy. Speedier completions would mean tying up less capital on site. Management is guiding towards a larger cash pile, which has historically been dwarfed by rivals, of more than £170 million at the end of this month. Analysts have forecast a dividend of 12.57p this year, but at the current share price the potential dividend yield is still weaker than peers at 3.3 per cent.

But aren’t you getting Crest Nicholson for a lot cheaper than other listed housebuilders? Maybe a year ago you were. The shares now trade at an 8 per cent premium to the net asset value forecast by analysts at the end of October. That’s not much lower than the 13 per cent premium for Redrow or 15 per cent for Bellway. On a forward earnings basis, the shares trade at a premium to those two plus much larger players like Barratt, even based upon earnings forecasts three years out.

At a time when build and labour cost inflation threatens to rise again and house price growth may slow, there have been easier environments to grow margins. Crest has a higher margin for error in executing its targets than other housebuilders.

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ADVICE Avoid
WHY The shares do not look attractively valued compared with peers, given weaker margins and lower scale

Bloomsbury Publishing
The boy wizard made Bloomsbury Publishing famous but it is expansion in digital academic materials that is the magic potion for its shares.

Selling online scholarly resources through annual subscriptions to libraries and other institutions is a fast-growing revenue stream. The group is on track to generate £15 million from this business this year but management plans to grow that organically by about half over the next five years.

Investors are willing to pay a higher price for the reliability of subscription resources — just look at Relx. Yes, its scale is larger but its shares attract a much richer forward price-to-earnings ratio of 26, against a multiple of 19 for Bloomsbury shares.

But growth in digital resources brings with it margin benefits, as do higher sales of ebooks. Together with the largely fixed cost base of the publishing group, pre-tax profits rose substantially ahead of revenue in the first six months of the year, more than doubling on the same time last year.

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Management might be trying to diversify the business but the main consumer division still accounts for more than 60 per cent of revenue. It has continued to find hits outside the Harry Potter series and revenue was up by more than a quarter over the first half.

Delivery delays have been avoided by printing books early and shipping to retailers. But retailers stocking books to the hilt ahead of the Christmas rush run the risk that Bloomsbury will receive higher returns if there’s too much stock left over. It also means there’s the threat that revenue growth will be slower during the second half.

Peel Hunt, the broker, has forecast adjusted pre-tax profits of £6.5 million during the final six months, compared with £12.9 million over the first half, giving a full-year figure 1 per cent ahead of last year.

Management is optimistic and so are investors — pushing the shares higher on the back of interim results took share price gains over the past 12 months to just over 50 per cent. But the growth in higher quality subscription-based digital revenues could send Bloomsbury’s value higher still.

ADVICE Buy
WHY Higher-margin digital growth bodes well for profits

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