Edmond Jackson's Stockwatch: Crest Nicholson Holdings

Is it worth jumping aboard rising housebuilding shares - or a case of "once you spot a bandwagon it's too late"?

The government's Help to Buy mortgage guarantee scheme certainly looks to be doing well, both from the way it has helped power housebuilders' shares out of the doldrums, and evidence from the housing market. The second quarter of 2013 saw a 6% rise in housing starts as work began on 29,510 new homes in England. Build rates are now 70% above their March 2009 trough, albeit still half the level required to meet demand, with decent-sized family homes in popular areas remaining in short supply.

Help to Buy is estimated able to fund 87,500 new build sales over three years, or nearly 60% of the current output of listed housebuilders. Effectively easier credit means surveyors now expect prices across the whole of the UK to increase by 2% on average over the coming year and by more than 4% in each of the next five years. They had already risen by 4.6% in July, the fastest pace for nearly three years amid rising consumer confidence.

This has prompted the governor of the Bank of England to reassure markets that the Bank will use measures to restrict the terms on which credit is provided - or even raise capital requirements on mortgages - to contain the effects of asset inflation. The bull case for housebuilding shares is this will achieve a fair compromise that keeps the housing market ticking over.

Lenders are anyway cracking down on cheap, interest-only mortgages, with borrowers unable to move unless they switch to a repayment loan with much higher monthly payments. Moving costs have also become substantial in terms of stamp duty and professional fees. So there are constraints it is important to watch.

The investment stance implies care towards shares where forward price/earnings (P/E) multiples are in the mid-teens and holders sit on substantial gains.

Richard Kirby, manager of the F&C Commercial Property Trust, explains why prospects for investors in the sector look good in: UK property market reaching turning point.

At the lower end of the P/E scale however, and with a quality business, FTSE 250-listed Crest Nicholson Holdings trades on 11 times the projected earnings per share scenario for its financial year to end-October 2014. A near 10% dip is expected for the current financial year due to shares issued in last February's flotation; however the profits turnaround into growth looks impressive (see table).

This group derives 95% of sales from upmarket homes, mainly in southern England and London, where higher incomes and prosperity are helping. The relatively modest P/E reflects Crest becoming a victim of the global financial meltdown and subsequent slide in the building sector, being taken over by its lenders - having been a listed company from 1968 to 2007.

February's re-flotation at 220p was therefore priced cautiously in the early months of housing market recovery. The offer raised nearly £225 million, enabling some existing investors in the buyout to exit for a total £169 million.

Despite this somewhat chequered history, the fundamentals and commercial momentum look good. Crest enjoys the longest "short-term" land bank with building consents of peer companies, and is at the upper end of its group range for long-term strategic land. Management has an excellent record of converting strategic land into short-term land bank, which protects margins rather than engaging competitive bidding. It also professes spare capacity to support a third greater housebuilding volume. The land bank has been augmented by 10 new sites, totalling just over 1,000 units, and new options been entered into regarding seven strategic sites with some 1,500 plots.

An update for the company's first half, to end-April, cited a 9% increase in housing completions to 746, with open-market legal completions up 30% to 699. In commercial property, a new Waitrose supermarket is due to open in Milton Keynes, and contracts have been exchanged with Morrison Supermarkets to build a store in Southampton.

This translated into strong progress at interims, with pre-tax profit up 39% to £22.2 million even after £5.9 million exceptional costs, on revenue up similarly to £192 million. There has also been a significant increase in forward sales, up 50% year-on-year to £330.9 million at end-June. No interim dividend was proposed, although the board has pledged to commence payouts at the year-end. Forecasts imply a prospective yield of about 2% covered four to five times by earnings. Net debt is negligible.

At 315p the shares are currently 12.5% off their early-July peak of 360p, having rallied from a market price of 255p upon re-listing nearly seven months ago. With encouraging news flow and a relatively modest P/E, they are likely to feature in value searches among housebuilders.

Recent broker targets look for 360p to 395p a share and Crest is worth watching if current jitters over Syria and quantitative easing tapering extend the profit-taking. Institutions and others may still be sitting on paper gains in the order of 40% for about six months' exposure, so consolidation is understandable.

But if progressive dynamics of the UK housing market continue, with excess inflation checked, this looks a useful play.

For more information see crestnicholson.com.