More on Crest Nicholson
Crest Nicholson: H1 2006 results
Residential and mixed used developer Crest Nicholson reported falling profits and flat sales in the half year to April 2006 which was blamed on a change in accounting rules.
The company reported that operating profit declined by 17% to £48.8m while pre-tax profit declined by 20% to £39.2m. Crest Nicholson said that reported profits were affected by the switch to IFRS standards, principally relating to recognition of housing revenue.
The company now records sales on the basis of “legal completion” rather than on “build completion”. Legal completion takes place when the ownership of the property is transferred to the buyer. Build completion takes place when all the construction work on the building is finished. There is a time lag between the
two; which should be (rightly) reflected in a drop in both sales and profits.
Strangely enough, the company’s sales have not dropped – indeed, they have increased by 1% (£355.1m). Unfortunately the company does not quantify the impact that the change in accounting rules has had on profits, so it is difficult to assess how significant this really is.
What is fairly clear is that the company’s margins have contracted – from 23.9% the previous year to 20.3% in the current year. Crest Nicholson does go on to say that the change in accounting rules resulted in enhancing the comparative half year through the inclusion of high margin sales previously recorded in 2004.
Although profits declined, the press release highlighted the favourable ‘headline’ numbers. Sales of standard priced units rose by 2.5% and those of low-cost houses by 72%. Housing turnover rose 6.8%, total completions for the year are expected to be 20% higher than last year and the company has already hit 85% of its full year sales target.
What appears to have happened is that the company has aggressively sold low-cost (and low margin) houses, which has helped prop up the sales figure but because margins on these products are thinner than with standard units, overall profits have fallen.
Further, the company has probably had to cut selling prices to achieve the increases in units sold – average selling prices have fallen to £188,000 (from £208,000 last year) The company blames the fall in the average selling price on the change in sales mix (due to more cheap housing being sold) and while this is undoubtedly a factor, the failure to provide average selling prices for the two categories of houses (ie standard and affordable) does feed our suspicion that prices were slashed across the board to dispose of housing stock.
Crest Nicholson maintains an optimistic outlook on the future claiming that reservation rates are better than in the comparative period and that there is sufficient house price growth to offset build cost inflation.
We have been bearish on the property market in general and the housing market in particular for some time and the weaker results and the company’s unseemly anxiety to put the best spin on them, does nothing to add to our confidence in the sector.
The share trades at 513p, on aprospective PE (2007 earnings) of 9.6x with a yield of 2.9%.
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