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Questor: this simple rule of thumb suggests that Crest Nicholson remains undervalued. Hold

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Completed homes on a Crest Nicholson Holdings Plc new housing development in Tiptree - Chris Ratcliffe/Bloomberg
Completed homes on a Crest Nicholson Holdings Plc new housing development in Tiptree - Chris Ratcliffe/Bloomberg

Forward sales, volumes, prices, revenues, margins and profits are all rising at the housebuilder Crest Nicholson, according to first-half results published last week, while the balance sheet has net cash and the company is returning to the dividend list with an interim payment of 4.1p a share.

Better still, demand for good-quality homes still seems to be outstripping supply, even before state-backed incentives such as Help to Buy, and the company is benefiting from the apparent shift toward bigger homes, as those who can afford to do so look for properties that are better suited to remote working.

As a result, the shares still have the potential to reward patient support, even if the easy money may already have been made for those who bought them after our assessment in November last year when they were trading at net asset value.

The favourable backdrop means the chief executive, Peter Truscott, has some valuable assistance when it comes to implementing the company’s turnaround strategy set out in 2019 and driving operating margins closer to the levels achieved by rivals – Crest Nicholson’s returns on sales in 2018 and 2019 lagged those of its FTSE 100 and FTSE 250 competitors such as Redrow, Bellway and Barratt by a good five to 10 percentage points.

Truscott is targeting an operating margin of 18pc to 20pc in the medium term, which is more like it, although higher raw material and labour costs, and availability, need to be watched carefully in the near term.

Higher returns on sales would help provide a kicker to earnings growth. Analysts expect earnings per share to rebound from a stated loss in the year to October 2020 to 27p in the current fiscal year and then 34p and 41p. The current share price is about 430p – and 10.5 times forecast earnings is not a rich multiple by any means, while the shares should also offer a tidy yield, covered some 2.5 times by earnings.

In addition, Crest Nicholson still trades on only 1.3 times net asset value, since the market value is £1.1bn and shareholders’ funds came to £869m at the end of the first half of the fiscal year. An analysts’ rule of thumb is that housebuilders trade at or below net asset value when sentiment and business are depressed and nearer to twice NAV when the cycle is going well and the sector is in favour with investors.

The shares trade nearer the lower end of that range, which suggests the potential for a recovery in valuation, especially if Truscott can deliver on those margin targets.

Crest Nicholson still appears to offer long-term value.

Questor says: hold

Ticker: CRST

Share price at close: 429.2p

Update: St Modwen Properties

Well, every little helps. Private equity giant Blackstone is raising its cash bid for St Modwen Properties to 560p from 542p a share, a price that appears to have the wholehearted endorsement of the FTSE 250 firm’s board. Shareholders in St Modwen, a brownfield property regeneration specialist, can now therefore sit and wait for the general meeting on July 21 (where they can also make their voices heard).

A successful offer would give us a profit of 25pc since our first look in March last year and justify our investment thesis that the shares looked good value relative to their net asset value and the potential for growth in that figure – although there remains the nagging doubt that Blackstone may still be getting a bargain, given the outlook in Britain for e-commerce warehousing and affordable housing.

As an aside, another company researched by this column – the grocery chain Morrisons in 2016 – is also on the receiving end of a bid from private equity, for similar reasons to St Modwen: a solid balance sheet, plenty of asset backing and a reasonable valuation. But in the case of Morrisons we gormlessly got frustrated with a listless share price and advised growth seekers (if not income investors) to sell in January last year.

Our investment thesis is playing out, but some readers will have missed out on this occasion in a painful reminder of Warren Buffett’s observation that “the stock market is a device to transfer money from the impatient to the patient”. Memo to self: Be More Patient.

Questor says: hold

Ticker: SMP

Share price at close: 557p

Russ Mould is investment director at AJ Bell, the stockbroker.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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