Disclaimer: The views expressed here are mine and may change without notice. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing. Please see important disclaimers here and here.
Crest currently trades at a market capitalization of roughly £380 million, despite holding tangible book value above £700 million and sitting at a 10-year low. At first glance, one might assume such a steep discount implies heavy losses. But that isn’t the case here. In fact, Crest remains profitable and carries only modest debt of around £72 million—just about 10% of equity.
It is no secret that the UK homebuilding industry is going through tough times. Higher interest rates and elevated home prices have pushed affordability out of reach for many buyers, while inflation has squeezed homebuilder margins. The industry has also been weighed down by government mandates requiring homebuilders to remediate potential fire safety hazards following the Grenfell tragedy. That said, several factors create a margin of safety at current levels.
Crest trades at about a 45% discount to book value, which is largely comprised of land and buildings. These assets are unlikely to lose significant value, as land generally appreciates with inflation due to rising development costs. In fact, U.K. home values, when adjusted for inflation, have been flat since 2010 and down since 2022. In addition, Crest carries low debt, giving it resilience through industry downturns.
Looking at profitability, the company has a satisfactory exhibit during the past 10 years. For the fiscal years 2015-2024, the earnings averaged £97 million (before exceptional items such as fire safety provisions).
As the short-term headwinds described above fade, Crest should be able to return closer to its normal earning power. Encouragingly, the company has already completed over 90% of the required fire safety assessments, reducing a major overhang.
Table I
Table II
Crest is not without drawbacks. Returns on capital and equity are only moderate (Table II), reflecting the commoditized nature of its product. The balance sheet shows assets and retained earnings growing in tandem, but without clear signs of operational improvement—something the new CEO will hopefully address. Its focus on mid-luxury homes also increases vulnerability in today’s affordability-constrained market. And while the fire safety issue is largely addressed, future regulatory changes remain an unpredictable risk. For this reason, investments like Crest are often best approached within a basket strategy rather than as a single concentrated position.
Currently nobody wants to own UK homebuilders. However, I like businesses in such unpopular industries where I see margin of safety and potential for generating satisfactory over the long-run.
