Shares in housebuilder Crest Nicholson were -7% as the company came out with a miserable H1 report that pointed to ballooning costs and flat pricing structure as a source of lower operating margins (down to 17.2% from 19.1% a year ago). Despite revenues +13%, continuing build cost inflation at 3-4% was devouring pre-tax profits (-2%).

With the company unable to significantly upgrade their pricing structure as the housing sector was being hit by Brexit uncertainties, there was precious little Crest Nicholson was able to achieve to offset rising cost pressure.

Crest Nicholson was attempting to alleviate some of the pressure on operating margins by investing in areas with more affordable housing, yet this would only address one side of the equation, with the issue of costs left unaddressed by the company apart from vague promises to tackle the problem going forward. And with the average sale price +5%, would some of the more expensive developments end up much harder to sell?

Markets were unimpressed with lack of a clear cost control strategy and with UK housing sector on the downturn (with latest Halifax House Price May data pointing to a still very soft market) it is not clear if the outlook for the housebuilder will improve substantially.

Crest Nicholson pointed out that cost inflation was “showing some signs of moderation” which read like a potential admission that the company was at the mercy of the macroeconomic environment and wasn’t taking proactive enough steps to put a leash on rising build costs.

Artjom Hatsaturjants, Research Analyst, 12 June 2018