Home Stock Market Why this FTSE 250 stock has plenty of upside potential! – The Motley Fool UK

Why this FTSE 250 stock has plenty of upside potential! – The Motley Fool UK

by callingemout
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I consider housebuilder Crest Nicholson (LSE:CRST) as a good buy for my portfolio right now. The FTSE 250 stock is certainly trading at a discount, having fallen from highs of over £6 a share in 2017. The sub-£3 share could be too cheap to miss, and evidence suggests the company is on track to make solid progress following the Covid-19 pandemic.

In 2021, the firm returned to profit after a difficult pandemic for all UK housebuilders, posting a pre-tax profit of £86.9m — an impressive turnaround from 2020 when Crest registered a loss of £13.5m.

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Crest currently offers an attractive dividend yield of 4.9% and has a price-to-earnings ratio of 7.84.

The firm is also starting to see the benefit of several strategic decisions. In January, the board spoke of a “transformed” balance sheet, with net cash at year-end totalling £252.8m, up from £142.2m at the end of 2020.

Crest also noted that its return on capital employed increased to 17.2% from 7.6%.

The firm reiterated that 2022 should be less volatile than the previous two years and suggested that the new leadership team had established a strong footing for future growth.

Crest also announced that 63% of revenue for the 2022 financial year was already covered.

We were delighted to increase profit expectations twice in the year and we have started 2022 with a strong forward order book and everyone in Crest Nicholson is excited about our plans for expansion,” said CEO Peter Truscott.

Furthermore, the firm is seemingly less exposed to costly recladding procedures which have set other housebuilders back tens of millions.

The broader outlook for the industry is positive too. This week, Halifax said that house prices were currently rising at their fastest rate in 15 years.

Housebuilders, however, will need to overcome inflationary pressure on building material and labour. Research published by Knight Frank in February showed that 90% of companies anticipated the cost of building to rise further across England in 2022.

While build cost inflation this year isn’t expected to be as high as 2021, rising hydrocarbon prices — accelerated by sanctions on Russia — may change this forecast.

And after years of low-cost mortgages, there’s also concern that further interest rate rises could dampen demand for new homes and even contribute to falling property prices.

In summary, it’s clear that Crest still has some way to go in order to get back to its 2017 heights, but the signs are positive if it can successfully navigate inflationary pressure. This is why I hold them in my Stocks and Shares ISA and will increase my position.

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James Fox owns shares in Crest Nicholson. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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