This article was taken from the Spring 2025 edition of 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications
The UK has a much-discussed housing shortage, with Labour having a target to build 1.5 million new homes before the current parliament ends in 2029. Despite the long-term drivers of demand, housebuilders have struggled in recent years. Rising costs have squeezed margins, with inflation also hitting consumers and impacting affordability. In addition, the end of the government-backed Help to Buy Scheme and planning and regulation challenges have been headwinds in the sector. Crest Nicholson is a smaller competitor in the space, with a market capitalisation of just £422.6m. Following a tough trading period, the new CEO Martyn Clark is looking to grow the company into a larger, higher-margin business with a renewed focus on the mid-premium sector.
Crest Nicholson has over 60 years of experience as a home developer and is now divided into six regional housebuilding divisions alongside a Partnerships & Strategic Land division which manages the strategic acquisition of land. The company buys land, builds, markets, and sells housing, and provides after-sales support to customers. In addition, Crest Nicholson may partner with the public sector or private rented sector (PRS) on developments, including for affordable housing.
The company recently released its 2024 annual report, with results covering the year to October 2024. Investors were left disappointed by a £143.7m loss for the period. Adjusted profit before tax, which excludes exceptional items, fell to £22.4m from £48m in the year prior. Revenue, margins, and return on capital employed all fell, with the company shifting to a net debt position from £64.9m net cash by the end of the 2023 financial year. The bottom line was heavily impacted by an exceptional charge of £166.1m, including a £131.7m provision for fire safety remediation, in light of tighter regulation following the Grenfell Tower fire. While the results were partially due to a challenging economic environment, there are also questions around Crest Nicholson’s strategy and management. In 2024, CEO Peter Truscott was replaced by Martyn Clark, who had previously been chief commercial officer at competitor Persimmon. At the 2025 Capital Markets Day, Clark outlined a new competitive strategy and return targets for the next five years.
PRS, where Crest Nicholson partners with another company to build housing for private renting, has been a struggling division. The building contracts are fixed, based on initial market values, so Crest Nicholson does not benefit from growth in housing prices. In addition, it takes on the risk of rising business costs over the course of the development. In the new strategy, the company is aiming to minimise PRS work to focus on the higher margin private development business.
Crest Nicholson acknowledges that it has previously had a lack of clarity on target customer and strategic focus. Both build quality and brand have suffered from cheaper materials and insufficient training. The company is turning its focus towards the mid-premium segment, which comprises higher value properties aimed at more affluent and discerning buyers. These are generally second or third movers, or older people downsizing. For this group, location and quality are the main priorities and they are generally more resilient to economic downturns given greater household assets and cash reserves. The mid premium market is currently dominated by Redrow, Bloor, and Cala, but there is a long tail of fragmented regional builders from which Crest Nicholson hopes to take market share.
In order to improve its appeal to mid premium consumers, the company is optimising building layouts, while offering a broad range of customer upgrade options. As opposed to using cheaper materials and prioritising volume, there is a renewed focus on improved quality and a standardised building process to reduce warranty claims and repair costs. Alongside focus on the product, Crest Nicholson is investing in the quality of customer service and sales teams to improve the buying experience, including aftermarket support. It will also establish a separate fire remediation team allowing the internal division to focus on housing.
Management expects these changes to reduce overhead costs from 9% to 7% of revenue. It is targeting a mid-single-digit annual growth rate in completions over the next five years, alongside gross margin expansion from 14% to over 20%. While Crest Nicholson’s return on capital employed currently sits at an uninspiring 4%, management is anticipating around 2% improvement annually, targeting 13%+ by 2029. The strategy and return targets are ambitious, and it appears that investors remain hesitant. The share price has declined by over 2% in the year-to-date given the disappointing results and weakening of the balance sheet, though it rallied slightly following the Capital Markets Day. With just a 1.35% yield and management leaving open the possibility of a dividend cut, there is little to attract income seeking investors. However, there are early signs of operational improvements, with improved sales rates in the first months of 2025. Shares are trading at lower valuations than peers, and there could be potential for significant upside if the strategic initiatives begin to perform. However, given the continued economic challenges facing the UK consumer and the housebuilding sector, there is significant uncertainty around the future of Crest Nicholson.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publication but may have changed at point of reading.