Crest Nicholson
Price £2.54
52 week high-low £2.94 – £1.71
Net Yield 6.66%
Hist/Pros PER 25/13
Equity Market Cap (M) £652
Real Estate
Duncan Cooper (CFO); David Brown (Executive Managing Director) and Jenny Matthews (Head of Investor Relations)
Crest Nicholson is a house builder operating predominantly in the South of England. House builder shares have struggled since the end of 2021, with rising interest rates affecting demand for their houses and rising input costs squeezing their margins. The nadir for share prices occurred in the wake of the mini budget when rapidly rising mortgage rates portended much weaker housing demand going forwards. Given this outlook, Duncan naturally addressed it by arguing that the world was looking more positive. He highlighted that banks are now better capitalised and have avoided delinquencies and foreclosures in a way that was seen in 2007. Mortgage rates have also come down since the Trussonomics shock, thus creating less of an affordability cliff than was initially feared.
House builders are, as Duncan conceded, ultimately price takers and will inevitably see margin decline if house prices fall persistently. Yet Duncan was more sanguine, in light of strong sector balance sheets and a general moratorium on buying new land. House builders also don’t burn through cash like retail companies when downturns do come. Most potential customers don’t walk away from home purchases and those that have exchanged are very unlikely to default – so this tends to provide more protection.
Looking forward, Duncan was keen to stress how important housebuilding is likely to be in next year’s election, with him predicting that the issue will be front and centre in manifestos. Until the election, the business must navigate ongoing cost pressures. He explained that some of this was abating slightly, however managing this will be key to reducing the severity of any margin decline in the year to come.
Rolls-Royce
Price £1.50
52 week high-low £1.60 – £0.64
Net Yield 0.00%
Hist/Pros PER n/a /0.64
Equity Market Cap (M) £12,551
Industrials
Jeremy Bragg (Investor Relations Director)
This once stalwart of UK industry and staple in portfolios has developed an unfortunate reputation for restructuring, disliked accounting practices and overrunning contracts. As a new CEO takes the helm, could Rolls-Royce finally be on the path to recovery? So argued Jeremy Bragg, the also relatively new Head of Investor Relations.
Jeremy explained how all three divisions (Civil Aerospace, Power Systems and Defence) will all have new heads by the close of this year. This, in conjunction with the appointment of Tufan Erginbilgic, a specialist turnaround CEO, should catalyse the much needed change to its culture. While a cultural shift will be slow, there are more immediate changes to contracts and pricing, where there will be more oversight at the senior management level, which Rolls-Royce hopes will avoid repetition of past contract failures. One of Tufan’s first actions was a benchmarking exercise focusing on each of the divisions and from this he has identified that the company has higher overheads than its peers. Cost cutting is to come and this, stressed Jeremy, is where Tufan’s previous turnaround experience should help.
Jeremy was also keen to stress the strength of some of Rolls-Royce’s key product lines. In the civil aerospace business, where its focus is on wide-body planes, it has a best in class engine. In the Defence business, its exposure to the recently confirmed AUKUS deal illustrates the strength of Rolls-Royce’s engineering which has been ubiquitous within UK defence for decades.
It is too soon to tell whether this turnaround will drive success, but as Jeremy highlighted, this is likely to be easier with the tailwind of increased defence spending and the aerospace recovery.
Smiths Group
Price £16.19
52 week high-low £18.07 – £13.64
Net Yield 2.48%
Hist/Pros PER 24/17
Equity Market Cap (M) £5,674
Industrials
Jemma Spalton (Director of Communications and Investor Relations) and Stephanie Heathers (Head of Investor Relations)
Smiths Group has five divisions: John Crane (35% of total revenue) produces specialised mechanical cartridge seals; Smiths Detection (26%) makes scanning and screening systems for air and sea ports, and crowd events; Smiths Interconnect (14%) produces electronic components for use in remote/adverse environments and space; and Flex-Tek (25%), which makes components to safely move gas/liquid in and around buildings.
For some time, Smiths has had weak organic growth (i.e. growth through sales and output rather than mergers or takeovers), declining operating margins and compound annual growth rates below the rate of GDP growth. However its results in the first half of 2023 have improved. Organic sales grew +13.5% year-on-year, and its operating margin rose by 20 basis points to 16.1%, with strong performance and cost inflation across its divisions.
Jemma attributed this performance to Paul Keel, who became CEO in May 2021. Paul has repurposed the operating model, equipping divisional experts with resource to address operational inefficiencies. A set of key performance indicators has been developed to measure the progress of each division compared to the others. Paul has also diversified revenue sources to smooth out cyclical trends, by expanding some products into new markets. For example, using pre-existing intellectual property for oil, gas and water system seals in the emerging hydrogen system seals market, where competition is low.
High demand from most end user markets and a lack of flexibility in prices will continue to generate revenue growth.US construction and semiconductor testing are exceptions; both are facing macroeconomic headwinds and adverse positions in their product cycles.
CONSUMER DISCRETIONARY Dowlais Group
WH Smith
Whitbread
CONSUMER STAPLESBarclays
Cranswick
Haleon
FINANCIALSLloyds
M&G,
Beazley
Schroders
Chesnara
Prudential
HEALTH CAREDechra Pharmaceuticals
Genus
INDUSTRIALSSmiths Group
Experian
RELX
Spirax Sarco
IMI
Diploma
MATERIALSRio Tinto
Hill & Smith
REAL ESTATESEGRO
Shaftesbury Capital
Jack Summers, CFA, Research Analyst
Henry Birt, Assistant Research Analyst
