Crest Nicholson has been its own worst enemy but two key factors give us grounds for hope

Housebuilder’s shares look cheap as new boss takes up the reins and its balance sheet has net cash ‘For shares to really spring to life investors may want to see an end to miscues and interest rate cuts’

Disappointing trading updates or results from Zytronic, Crest Nicholson and H&T mean this column has hardly covered itself in glory so far in 2024 and it may be scant consolation that Crest Nicholson’s actual full-year results, released last week, contained no nasty surprises.

Shares in the FTSE 250 housebuilder, covered here in November 2020, barely flinched on the news of a sharp drop in completions, sales and profits in the year to October 2023 and this may have been because of two key pillars of this column’s investment case for the stock: a balance sheet that has net cash and the shares’ lowly valuation.

Investors could be forgiven for doing a double take at this point, because a price-to-earnings multiple of more than 18 times forecast profits and a forecast dividend yield of 2.2pc for 2024 represent a premium and a discount respectively to the wider London stock market.

In this context, the valuation does not seem compelling. Yet Crest Nicholson’s earnings are currently depressed and analysts believe the dividend will be cut accordingly in the coming 12 months. It may be optimistic to expect a return to the peak earnings per share figure of 66p and peak dividend of 33p seen in 2017 and 2018 (they benefited hugely from record low interest rates and the Help to Buy scheme), but even numbers at half those levels would make the stock look cheap. Moreover, relative to the value of its tangible assets, Crest Nicholson’s shares are the cheapest of any of the big quoted housebuilders. Based on the balance sheet just out for fiscal 2023, the shares trade at 0.6 times tangible net asset, or book, value per share; the eight builders in the FTSE 350 trade at an average of 1.2 times.

The old rule of thumb has it that builders are cheap when they trade at book value or less and expensive when they trade at twice book value or more.

Admittedly, there is a reason for this discount, as sometimes it seems that Crest Nicholson can hardly get out of its own way. Profit margins peaked in 2016 and earnings in 2017, a good year or two before other builders began to feel the pinch from a slowing economy, the pandemic, labour shortages, higher raw material costs and finally increases in interest rates and mortgage rates. Even the latest full-year results featured additional provisions over a problematic housing project in Surrey and a legal claim related to a fire at another site in 2021.

Peter Truscott arrived as chief executive in 2019 to try to clean house, but his job was made much harder by Covid. His successor, Martyn Clark, will join from rival Persimmon with the task of carrying on Truscott’s work but for the shares to really spring to life investors may want to see both an end to the operational miscues and interest rate cuts from the Bank of England.

Sticky inflation means markets are now pushing back their expectations for the first cut to May from March, but that net cash on the balance sheet allows us to be patient. Hold.

Further marked gains in the price of uranium mean the latest quarterly update last week from Yellow Cake featured a further increase in the value of the company’s assets, which now come to 840p a share, based on a commodity price of $105 per pound (up from $73.50 at the end of September and $91 at the end of December).

The Aim-quoted shares trade at a near-20pc discount to that, a large gap by recent standards, and ongoing uncertainty over uranium supply, coupled with gathering demand as nuclear power stakes its claim to be a valuable source of secure, low-carbon energy, could yet drive the commodity price higher still. Yellow Cake, tipped here in August 2020, could prove to be particularly well positioned as it will hold 21.7m pounds of uranium oxide in its specialist French and Canadian warehouses on delivery of its latest purchase from Kazatomprom, the Kazakhstan miner, by June. It has the option to buy a further $100m of product every year until 2027.

This stockpile will become increasingly valuable if uranium prices continue to soar. The outlook for supply from Niger remains uncertain after last year’s coup. Canada’s Cameco cut its output forecasts last autumn. Russian supply is off limits and now Kazatomprom has warned of lower-than-expected production owing to shortages of key materials and construction problems at its mines in Kazakhstan. Hold.

Crest Nicholson HOLD Relative to the value of its tangible assets, its shares are the cheapest of any of the big quoted housebuilders