Conventional thinking would suggest you should avoid Crest Nicholson. The term ‘catching a falling knife’ springs to mind.
The company has sunk to multi-year lows after a series of disappointing updates exacerbated by general gloom around the UK economy.
Indeed, Crest Nicholson shares could go lower. Possibly significantly lower. But for those with a time horizon of more than a couple of years, the Crest Nicholson share price looks very good value.
One thing the market always underestimates with housebuilders is just how difficult it is for companies to grow to the scale of a housebuilder like Crest Nicholson.
The company had 31,369 total land bank plots as of 30th April.
The trading statement released this week highlighted that they had sold some of this land, but even after the sales, the value of Crest Nicholson’s land bank can only be replicated by only two or three other UK housebuilders.
There are just a few companies in the UK that can build houses to meet the deep-rooted structural demand on a scale that Crest Nicholson can.
So when the company misses completion estimates due to short-term challenges such as the Labour budget and their talk down of the economy, the resultant decline in shares should be seen as an opportunity.
The weakness in Crest Nicholson’s shares is almost entirely due to a soggy earnings outlook. And this is warranted given the recent slowing of housing market activity.
There is, however, an argument that investors should look beyond short-term earnings multiples to the value in housebuilders’ landbank and balance sheet.
With inventories of around £1bn and net assets of £733m as of April, Crest Nicholson is trading at a 40% discount to book value.
This is a metric long-term value investors will appreciate.