Michael Foster
Crest Nicholson is an unusual company. Not content with building nice new houses and industrial estates, it also sells sunglasses, artificial football pitches, heat pumps, soldering irons and marinas.
In short, it is a mini-conglomorate evolving into an important housebuilder and property trading company. It should build more than 1,500 homes this year, and its property development programme is worth more than £120m. Crest is also the leading light in grand plans to become involved with the largest privately funded town expansion scheme in Europe. Plans to sell off non-building-orientated industrial interests are proceeding.
The period of transition from a dull performance in the early 1980s is far from over, but City investors are finally beginning to recognise improving longer-term potential in the company.
Crest was founded in the early 1960s by a young man called Bryan Skinner, who started his career at ICI.
Mr Skinner set up a management consultancy to help pay his mortgage, then bought a housing plot, made a lot of money and bought a few more. He started Crest Homes in 1963 from an office above a tailor’s shop in Walton on Thames.
From the outset, Mr Skinner aimed to research the needs of house-buyers carefully. He avoided building a land bank, in the belief that the finance costs would be wasted, and set out a strict five-year plan which took Crest to the stock market in 1968.
Rapid expansion into the industrial and building world followed, kicking off with the purchase of a tennis court maker called En-tout-cas (literally “in all weather”) in 1969.
Then Crest bought C&N holdings, which brought yachting enthusiast Peter Nicholson’s name into the company. C&N owned things like Camper & Nicholsons Marine Equipment; a company skilled in document conveying systems called Dialled Despatches (now part of Crest’s Lamson group); a boat-building operation; an electricals group (sold to Cray in 1973); and a Gosport marina.
Crest’s lack of a land bank, and the cash flow of its new industrial division, helped it to start expanding after the property crash more quickly than most. Its property division began active trading in 1976, when it bought four sites in quick succession (and sold the developments two years later). Crest has never developed property for retention and still has no plans to do so.
By 1979, Crest Nicholson was making 61% of profits totalling £4.3m from housebuilding and property, and 39% from commercial and industrial activities. The latter were expanded by the purchase of the Crofton Optical group and Sharron jewellery (a Scottish wholesaling operation) in 1979-80. Greenwood, a maker of soldering irons, was bought for £3.6m in 1983. All-Pro-Turf, an artificial sports surface company based in the USA, came into En-tout-cas a year later at a cost of £530,000.
But the shrewdest purchase out of a mixed bunch during this period was the BVC vacuum-cleaner business, acquired from Bill Wyllie’s BSR electronics group in 1984 for £4m. Crest was neatly able to relocate the business within its own Bivac vacuum-cleaning division, and strip out a 22-acre site which it first planned to use for housebuilding, then decided to develop as a 238,000-sq ft technology and management complex in partnership with Esso, which eventually bought the site.
In the year to October 1984, Crest Nicholson made pre-tax profits of £8.5m, with the housebuilding and property profit contribution way ahead of the pre-interest total of £901,000 chipped in by the industrial divisions. The year ended a flat period of earnings per share growth for Crest. Its founder, Bryan Skinner, died after a long illness in March 1984, at the age of 54.
Around this time Roger Lewis became chief executive at Crest Nicholson. He was keen to encourage the corporate shift towards property and housebuilding, and soon enhanced it with an agreed bid for the C H Pearce group of Bristol worth £25m.
Pearce was a family-controlled contractor, property and housebuilding group first registered as a private company in 1946. It came to the stock market in 1968, and proceeded to grow in a sedate rather than dramatic manner. But its land bank attracted the interest of stock market speculators in 1985, together with its skills in project development near the M4 for companies such as Du Pont and Hewlett Packard. Expenditure of around £300,000 for marketing the Cardiff freeport in the mid-1980s was fruitless, but a pre-tax profits increase of 14% to £3.3m in the year to May 1985 was satisfying after an unexciting performance in the early 1980s. The company built around 500 homes that year.
Crest’s bid had to be agreed with the ruling Pearce family. It was announced in October 1985, and comprised 161 Crest shares for every 32 Pearce, plus £20.88 cash to value them at 674p each with each Crest at 120p.
The deal was a good one for Crest, if slightly disappointing to those stock market investors who forced Pearce’s shares up to 725p ahead of the news. It took Crest into the West Country in a big way, brought it the chance to boost housing sales to 1,350 in 1985-86 and enabled it to benefit from rationalisation and development of Pearce’s property plums.
“Crest has dithered about in a variety of other activities with mixed results, but the move to buy Pearce has brought the group back on track,” said the Daily Telegraph in early 1986 after the takeover went through. Crest then announced a one-for-five rights issue at 140p to raise £16.9m. A rise in pre-tax profits at Crest from £12.5m to £16.6m in the year to October 1986 showed that the merger with Pearce and a growing boom for housing and property were having a beneficial effect.
Today Crest Homes remains the most important of the company’s divisions — brokers Kleinwort Grieveson reckon that 63% of group pre-interest profits came from it last year.
The division, under Mike Freshney, is split into six regions stretching from southern England to the East Midlands. At least 1,500 homes will be built this year, and they range from £16,000 studio flats in Hereford to a £400,000 house on Kingston Hill, Surrey. People have argued that Crest has lately failed to exploit the vast margins available from up-market housing, in ways pioneered by companies like the Berkeley Group, run by ex-Crest man Tony Pidgely.
Berkeley’s shares have vastly outperformed Crest’s in recent times. But Crest Homes deputy Nigel Davies says: “We’ve been successful at all levels.” In conference last March Mike Freshney actually said that Crest planned to cut construction at the top end of the market in favour of starter homes.
Crest is developing homes (30% of them timber-framed) on 85 sites ranging in size from three to 300 units. Its most important historic site is at Bobblestock, Hereford, on land suitable for 1,000 homes released to Crest by the Church Commissioners over a period of years. It is close to completion, but several others are on stream to take its place.
This year’s biggest scheme is at West End Meadows, Burgess Hill, Sussex, shown below, suitable for around 300 units with prices from £58,000 to £145,000 per unit. The next two largest are at Luton (280 units) and Thorpe (196, on the site of an old gypsy encampment).
The shortage of housing land, and Crest’s increasingly voracious appetite, means the company has had to abandon the Bryan Skinner policy of not buying land ahead of need. It now aims to carry a “current” land bank with full planning permission, and a longer-term “strategic” land bank without the benefit of any consent.
Crest has around 1,600 acres of strategic land. The most important chunk is 600 acres north of Swindon, which it hopes to turn into part of that record-breaking 1,500-acre extension to the town. Crest is the leading member of the development consortium, which includes English China Clays, Costain, Tarmac and Prowting Homes (sister company to quoted property company Estates & General).
This “Haydon Development Group” has now applied for planning permission. If the Tories win the next election, the prospects for Government approval look good. Work could start by 1989-90 and a planning inquiry is due this November.
Haydon could have a mix of public and private housing comprising anything between 4,000 and 9,000 units. Its cost could be £500m; commercial development to serve the site is feasible and Kleinwort & Grieveson thinks that Crest could make £40m of profits from the scheme over the development period.
Other areas of Crest’s strategic land are at Chippenham (180 acres within the residential area of the North Wiltshire structure plan); Stansted (140 acres on options); and Stoke Gifford, near Bristol (140 acres). Land is typically bought at a sizeable discount to what it would be worth with planning permission: the Swindon site is in the books at just over agricultural value.
This year, Crest’s average selling price for units should go to well over £72,000, against £62,000 last time. Its land bank is secure for building programmes until autumn 1988; expect early news on the purchase with Tarmac of a 14-acre site in Hounslow from two property dealers.
Crest’s marina division works closely with Crest Homes; necessarily so, since the former makes only a limited profit from rental and sale of berths.
Crest has three current marina development schemes. Potentially the most lucrative is at Penarth, South Wales, where 230 homes will be going up for sale along 500 berths. This Portway Village Marina is at the mouth of the River Ely; many of the homes will overlook the water and prices per unit will range from £28,000 to £90,000. Milford Haven (within the local enterprise zone) will have 400 berths; and Amble 200. The schemes have EEC funding.
The rest of Crest’s yachting business includes yacht brokerage in the Mediterranean, and yacht charter holidays. The two businesses have been loss-makers for three years, and there is no apparent reason for Crest to keep them. Camper & Nicholson’s marine equipment division was sold to Smiths Industries last December.
Property is the second most important contributor to pre-interest profits (18% in 1985-86). The main coup last year was the letting and sale of a 60,000-sq ft office block in Woking. Scottish Widows bought the block (let to Phillips Petroleum) on a yield of 5.75%. Pre-funding was completed 18 months earlier despite local office over-supply.
The largest scheme in Crest’s current £120m programme is 300,000 sq ft of business park space at Hook, Surrey, where expected rents, says Crest’s property division boss Ian Ramsay, above, are circa £9 per sq ft. The land cost £500,000 an acre, and the finished value of the scheme £30 to £40m. It will be built in three phases.
At Crawley, work has begun on a 102,000-sq ft industrial building (with a potential rent of £6 per sq ft), while an 85,000-sq ft scheme at Wokingham has outline planning (it, too, could get £6). Bath Road, Slough, is the site for 23 units for small business users who could (maybe) buy space for £100 per sq ft and realise their profit if, or when, they grow and move to the industrial estate up the road. At Camberley, Crest is working on a major 350,000-sq ft business park in partnership with others.
Crest has put a fair emphasis on the industrial market in the last year, as Ian Ramsay is currently less keen on office schemes. Commercial developments at Purley, Marlow and Sheffield (totalling 74,000 sq ft) have seen retail areas snapped up before offices. On the retail side, Mr Ramsay is particularly proud of the recent purchase of a 1970s shopping precinct in Sittingbourne, Kent, from the former West Midlands County Council pension fund on a yield of 7%, which should rise usefully after next year’s rent reviews. The precinct, called The Forum, comprises 30 units. Crest also has small shop schemes at Wokingham and Thame.
Crest generally builds speculative schemes, aiming to trade them on, and close contact is kept with the housing division so that schemes can be shuffled as necessary. The relative cost of industrial and residential land in different areas fascinates Mr Ramsey; arbitrage between the two can be worthwhile.
Unusually, C H Pearce’s old property division remains under separate management. It has medium-sized schemes under way at Basingstoke, Windsor, Wokingham and Plymouth for resale to institutions. Longer term, it has 100 acres of land near Bristol Parkway which should provide a superstore for Sainsbury, and office, industrial and residential units; redevelopment of the massive docks area at Gloucester on which Pearce is working with the British Waterways Board (with final potential value of £30m); a town-centre development at Neath; and further areas of land at Bristol, of which 17 acres have been sold to Dee Corporation. The programme looks extremely interesting.
Crest Nicholson may well use Pearce’s contracting arm in the future, and certainly benefit from its advice and property partnerships, though 90% of work is currently on an arm’s-length basis.
Crest Nicholson’s industrial division has never been popular in the City, which tends to regard it as a distraction from Crest’s housing and property business. The shrinkage of its contribution to profits by comparison with the latter has helped Crest to take the point, hence the recent sales of the marine equipment division, Hygiene Management Services, the wholesale jewellery operation and Crest Leasing.
Crest has three other industrial divisions loosely allied to the building industry which it seems keen to keep. The most important is Lamson, which made profits of £1.4m last year in Britain and the Netherlands. It is a leading light in industrial vacuum-cleaning systems and the movement of documents and cash within buildings by mechanical means. It has put in systems at Tesco and Sainsbury supermarkets and Tottenham Football Club, as well as at the NatWest Tower and the Prudential’s HQ in Holborn.
In the sports world, Crest has had an erratic profits record. En-tout-cas and sister companies build tennis courts for local authorities, private individuals and sports clubs. They are also involved in sports equipment mail order. All-Pro has about one-third of all contracts for artificial sports club surfaces in the US, and Sporturf has put in artificial football pitches at a selection of British clubs (most recently Preston North End and Oldham Athletic). A three-year moratorium on artificial pitches by the Football League has suspended the potential in this market, but work is in hand for schools, race courses and hockey clubs. At Reading, Crest was recently able to install a new sports pitch and free land which it secured for redevelopment.
Calorex is a much smaller company. It makes heat pumps for around three-quarters of swimming pools installed in Britain.
Taken as a group, Crest Nicholson is in a strong financial position. Net borrowings of just under £30m in October 1986 represent less than half shareholders’ funds of £67.7m (90p per share), although that total does not include huge potential surpluses on developments and strategic land.
Group earnings per share were stodgy in the early 1980s, but the new thrust into property and housing encouraged by Roger Lewis lifted them to 15p in 1985-86 (nearly twice the total of five years before); the dividend was 4.75p (2.75p in 1981-82). The return on capital employed has remained strong because of Crest’s reluctance to get involved in major capital investment.
On Kleinwort Grieveson’s forecast of £21.5m profits for this year, Crest’s shares at 225p after a recent rerating are on a prospective earnings multiple of 12; its dividend yield is 3.5%. Those ratios could go to 10.3% and 4.1% if KG’s forecasts of £25.2m are confirmed.
Crest is sometimes seen as a potential bid target, although the company needs to promote itself more aggressively in the City to gain proper recognition for its recent deals and strategic shifts. Otherwise the shares look a good bet, on the assumption that our hectic housing market does not take a dive next year, when the pre-election mini-boom is over.
