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Crest Nicholson has dealt a blow to UK Housebuilders this morning with a profits warnings attributable to flat pricing and higher building costs (up 3-4%). While its own shares have plunged more than 12%, re-testing March lows, the read-across is understandably weighing on sector peers which trade 0.8-1.7% lower; Redrow worst off, Taylor Wimpey resisting best.
Although the full year 18/19 operating margin is still expected to be a respectable 18%, it is nonetheless at the bottom end of prior 18-20% guidance. More importantly, it would represent more than 200bp of margin contraction versus a stable 20.3% in 2017 and 20.4% in 2016.
With half the year still to go, the risk is that, even downwardly revised guidance proves wishful thinking, should the second half prove even tougher for both pricing and costs. Especially with official property price growth data suggesting continued softening of the market amid uncertainty about Brexit, weak UK growth/inflation and muddled messages on interest rates from the Bank of England.
The company itself points to an especially slow second hand market, implying homeowners staying put (especially those on the upper half of the property ladder), restraining the market. This can be supported by anecdotal evidence of it being increasingly difficult (especially in London & South East; the company’s target geographies) to find reputable and affordable builders who are available to extend your own property (less expensive than buying bigger), because they are all booked out, for the next 12-months.
The future for Crest thus looks less profitable. Unless, of course, material and/or labour costs fall or, conversely, house price growth re-accelerates. On the latter, management sees 5% average selling price growth likely represented a peak. Which puts the onus on cost growth to slow faster if margins are to be protected. If market inertia builds further and costs can’t be controlled, the company could be set for a big squeeze, hot on the heels of the UK’s big freeze.
Mike van Dulken, Head of Research, 16 May 2018
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