We are pleased to present the audio version of our Spring 2025 edition of 1875.
Transcript
Welcome to the audio version of Redmayne Bentley’s 1875 publication.
For the Spring 2025 edition of 1875, we explore the recent trade tariffs, and a UK-listed house builder, Crest Nicholson.
Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. There is an extra risk of losing money when shares are bought in some smaller companies. Redmayne Bentley has taken steps to ensure the accuracy of the information provided and was correct at time of publication but may have changed at point of reading. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares and investments mentioned.
Tariff Turmoil was written by Alastair Power, Investment Research Manager.
Financial markets had started 2025 on a positive note, with global equities posting strong initial returns before reversing direction in late February on the realisation that President Trump’s trade tariffs could become reality. April 2nd was dubbed ‘Liberation Day’ by the US President, with announcements of standard 10% tariffs on trading partners and further reciprocal tariffs on countries where the US has large goods trade deficits.
Equity markets have understandably reacted negatively to the worse-than-expected tariff announcements, with the US flagship index the S&P 500 falling nearly 5% during the following trading day. Any companies with large manufacturing exposure to areas such as Cambodia and Vietnam were hit particularly hard and automotive exporters such as Toyota and Nissan saw their share prices decline on the 25% automotive tariff. Selling pressure translated to increased buying of ‘risk off’ assets such as government bonds, which saw yields declining post the announcement, providing ballast to portfolios.
The announced tariffs represent a shift away from free trade and globalisation experienced over recent decades and are expected to result in inflationary pressure and slower rates of global economic growth. For the UK, we look relatively well placed with just the 10% standard tariff, but challenges remain for the steel and automotive sectors. More in-depth comment is provided within the Insight Article and some potential positives explored.
Within our Stock Focus article, UK mid-cap housebuilder Crest Nicholson is under review. Recent government announcements of planning reforms and increased housebuilding could be expected to be positive for the sector, but most housebuilders have seen lacklustre share price performance in recent years. Following a positively received capital markets day and updated strategy, sell-side analysts have issued several positive notes but whether this translates into improved earnings remains to be seen.
Periods of volatility such as the one at present are unfortunately a function of financial market participation and, when they do occur, it is understandable to see the highly valued areas experience some of the sharpest declines, as has been experienced in the US. It will take some time for the implications of the tariffs to feed through into corporate results and thus continued volatility can reasonably be expected.
Our Stock Focus article, on Crest Nicholson, was written by Ruth Harris, Investment Research Analyst.
The UK has a much-discussed housing shortage, with Labour having a target to build 1.5 million new homes before the current parliament ends in 2029. Despite the long-term drivers of demand, housebuilders have struggled in recent years. Rising costs have squeezed margins, with inflation also hitting consumers and impacting affordability. In addition, the end of the government-backed Help to Buy Scheme and planning and regulation challenges have been headwinds in the sector. Crest Nicholson is a smaller competitor in the space, with a market capitalisation of just £422.6m. Following a tough trading period, the new CEO, Martyn Clark, is looking to grow the company into a larger, higher-margin business with a renewed focus on the mid-premium sector.
Crest Nicholson has over 60 years of experience as a home developer and is now divided into six regional housebuilding divisions alongside a Partnerships & Strategic Land division which manages the strategic acquisition of land. The company buys land, builds, markets, and sells housing, and provides after-sales support to customers. In addition, Crest Nicholson may partner with the public sector or private rented sector (PRS) on developments, including for affordable housing.
The company recently released its 2024 annual report, with results covering the year to October 2024. Investors were left disappointed by a £143.7m loss for the period. Adjusted profit before tax, which excludes exceptional items, fell to £22.4m from £48m in the year prior. Revenue, margins, and return on capital employed all fell, with the company shifting to a net debt position from £64.9m net cash by the end of the 2023 financial year. The bottom line was heavily impacted by an exceptional charge of £166.1m, including a £131.7m provision for fire safety remediation, in light of tighter regulation following the Grenfell Tower fire. While the results were partially due to a challenging economic environment, there are also questions around Crest Nicholson’s strategy and management. In 2024, CEO Peter Truscott was replaced by Martyn Clark, who had previously been chief commercial officer at competitor Persimmon. At the 2025 Capital Markets Day, Clark outlined a new competitive strategy and return targets for the next five years.
PRS, where Crest Nicholson partners with another company to build housing for private renting, has been a struggling division. The building contracts are fixed, based on initial market values, so Crest Nicholson does not benefit from growth in housing prices. In addition, it takes on the risk of rising business costs over the course of the development. In the new strategy, the company is aiming to minimise PRS work to focus on the higher margin private development business.
Crest Nicholson acknowledges that it has previously had a lack of clarity on target consumer and strategic focus. Both build quality and brand have suffered from cheaper materials and insufficient training. The company is turning its focus towards the mid-premium segment, which comprises higher value properties aimed at more affluent and discerning buyers. These are generally second or third movers, or older people downsizing. For this group, location and quality are the main priorities and they are generally more resilient to economic downturns given greater household assets and cash reserves. The mid-premium market is currently dominated by Redrow, Bloor, and Cala, but there is a long tail of fragmented regional builders from which Crest Nicholson hopes to take market share.
In order to improve its appeal to mid premium customers, the company is optimising building layouts, while offering a broad range of consumer upgrade options. As opposed to using cheaper materials and prioritising volume, there is a renewed focus on improved quality and a standardised building process to reduce warranty claims and repair costs. Alongside focus on the product, Crest Nicholson is investing in the quality of customer service and sales teams to improve the buying experience, including aftermarket support. It will also establish a separate fire remediation team allowing the internal division to focus on housing.
Management expects these changes to reduce overhead costs from 9% to 7% of revenue. It is targeting a mid-single-digit annual growth rate in completions over the next five years, alongside gross margin expansion from 14% to over 20%. While Crest Nicholson’s return on capital employed currently sits at an uninspiring 4%, management is anticipating around 2% improvement annually, targeting 13%+ by 2029. The strategy and return targets are ambitious, and it appears that investors remain hesitant. The share price has declined by over 2% in the year-to-date given the disappointing results and weakening of the balance sheet, though it rallied slightly following the Capital Markets Day. With just a 1.35% yield and management leaving open the possibility of a dividend cut, there is little to attract income seeking investors. However, there are early signs of operational improvements, with improved sales rates in the first months of 2025. Shares are trading at lower valuations than peers, and there could be potential for significant upside if the strategic initiatives begin to perform. However, given the continued economic challenges facing the UK consumer and the housebuilding sector, there is significant uncertainty around the future of Crest Nicholson.
Liberation Day, was written by Alastair Power, Investment Research Manager.
Wednesday 2nd April 2025 was marked as ‘Liberation Day’ by President Trump as he sought to re-write the perceived wrongs around the trade imbalances which had arisen following decades of globalisation and free trade. Financial markets had been expecting the announcement, moving lower in anticipation, but the 10% universal tariff on all imported goods in addition to reciprocal tariffs on select countries was worse than expected. Global equity markets moved sharply lower on the news, with the US S&P 500 index falling nearly 5% in a single day.
Countries hit hardest by reciprocal tariffs included China and Vietnam, with US companies such as sportswear brand Nike experiencing a near 15% decline, given the scale of its manufacturing in both countries. Other consumer-focused companies with large manufacturing bases in emerging markets, such as Apple and Adidas, also experienced significant share price declines. Autos continue to be the most challenged sector given the 25% tariffs imposed. Companies with large amounts of US-based revenues are some of the worst affected with the likes of Toyota and Nissan experiencing large share price declines year-to-date.
While equity markets have experienced declines, government bonds have provided a ballast to portfolios. At the time of writing, 5-year gilt yields are trading below the 4% level and 10-year gilt yields are also declining as investors seek safety in government bonds. Few areas of UK financial markets were initially stable. The Real Estate Investment Trust (REIT) sector performed well, with the FTSE EPRA Nareit UK index falling just 0.52% on the day of the announced tariffs and rising 1.77% the following day. Utility companies also performed well, with National Grid, Severn Trent, and United Utilities seeing share price increases before succumbing to the wider sell-off.
The real question post ‘Liberation Day’ is ‘where do we go from here?’ Where the cost will be borne for these tariffs remains unclear, but expectations are for upward pressure on inflation, especially in the US given additional costs within supply chains, a squeezing of consumer discretionary spending, and overall lower levels of global economic growth. Lower levels of business and consumer confidence could lead to a negative feedback loop, with slower economic growth causing further declines in confidence and so on.
For the UK, we initially look to have fared well, receiving just the baseline 10% tariff excluding autos and steel. Given the approximate £60bn of goods exports to the US, a very small percentage of GDP, the impact of the tariffs is lessened, and some exports could find a new direction towards Continental Europe. Challenges remain for the automotive and steel industries but there are positives to be found for the fiscal outlook with sterling strengthening against the dollar, government bond yields falling, and the potential for interest rate cuts from the Bank of England to be brought forward. For domestically exposed UK companies, this could be positive.
Despite heightened political uncertainty, there continues to be areas of attraction in markets, especially domestically. Gilt yields, while moving lower in recent days are still positive on an inflation adjusted basis. The compensation, or spread, offered to investors in high grade corporate bonds has widened, with the 5.7% yield on a broad-based index still attractive. Within the previously mentioned REIT sector, share price discounts to net asset values remain wide and growing yields in the 6-8% region are on offer. For equity markets, prices are likely to remain volatile depending on geopolitical news flow and the associated impacts will take time to be reflected in corporate profitability.
