UBS initiates Crest Nicholson at 'buy'

UBS said the stock was an “attractive risk-reward” in an uncertain outlook for the sector following Britain’s vote to leave the European Union.

“We initiate coverage on Crest Nicholson with a ‘buy’ rating based on three key reasons: (1) An attractive dividend yield of 7.5% for calendar year 2017; (2) Adjusted return on capital employed is one of the strongest in the sector at 21.4% for 2015 and (3) compelling valuation with the stock trading at 8.5x price to earnings ratio 2017 and 1.3x premium to net asset value,” the bank said.

“In light of our expectation for a slower housing cycle in the next 2 years, we believe the support from Help-to-Buy, which accounts for 30% of volumes, largely offsets concerns of having 10% revenue exposure to London and 50% apartment content.”

UBS said Crest is the highest dividend payer among mid-cap housebuilders. The company has a “progressive dividend policy” and is committed to lowering earnings per share (EPS)/dividend per share (DPS) cover to 2.0 x by full year 2017 from 2.5 x in 2015.

The bank expects Crest's EPS to fall 28% in 2017 but the DPS to be raised to 30p from 27.6p a year earlier.

“We see Crest well positioned to quickly turn net cash positive as land buying slows, resulting in a comfortable 2.1x dividend cover on a free cash flow basis,” UBS said.

“It should thus generate an attractive dividend yield of 7.5% for 2017, differentiating itself from other mid-cap peers.”

Shares rose 2.75% to 430.10p at 0921 BST.