McCarthy & Stone issues warning after “tough year” with trading update

RETIREMENT housebuilder McCarthy & Stone has warned of a drop in profits following a “tough year” in its latest trading update.

The update for the full year ending August 31 states that operating profit for the year is expected to be in the range of £65 million to £73 million, dropping from the 2017 figure of £96 million. Year-end next cash is also expected to be around £4 million, down significantly from £27 million the previous year.

Full year revenue is expected to be around £670 million, up £9 million from 2017, supported by a 10% increase in average selling price to £300,000. The group’s sale of Freehold Revisionary Interests was also completed in August, with a cash value of around £25 million.

McCarthy & Stone’s year-end forward order book is currently 23% ahead of 2017 at around £174 million, up from £141 million. This has been supported through 69 sales released during the year, compared to 52 in 2017.

The group said it exercised “additional caution” throughout the year, attributed to the uncertainty to the Government’s announcement on ground rents. This resulted in 54 land exchanges and 37 planning consents achieved, down from 75 and 64, respectively, in 2017.

John Tonkiss, interim chief executive officer said, “It has been a tough year for the group with ongoing adverse market conditions continuing to impact the business, and without the benefit of any additional government support for the retirement housing sector.

“In light of the continuing challenging market conditions the group began a review of its strategy in April. As previously announced, our strategic focus will be on pursuing a more measured trajectory and smoothing our workflow to create a more efficient business. This will naturally lead to a right-sizing of our cost base, with build cost savings being a key area of focus. Additionally, we are continuing to trial a number of strategic initiatives designed to increase customer appeal and offer a broader choice of tenure options, increased flexibility and affordability. We will provide the market with more detail on this at our strategy update later this month.”

He added, “We are continuing to engage with government in an effort to secure an exemption from the proposed changed to ground rents. We believe that there is a strong case for a specific exemption for the retirement housebuilding sector and we are awaiting clarification on this matter. Until this is received, we continue our planning to try and mitigate the potential impact on the business, including maintaining discipline around our cash position and adopting a more measured approach to securing land.”

Commenting on the results, John Moore, senior investment manager at Brewin Dolphin in Scotland said, “On the face of it, McCarthy & Stone should be a goldmine. It’s offering a product in that the UK’s aging society needs in steadily growing volumes, due to demographics and changes in life expectancy.

“Nevertheless, the company has struggled over the years and this mixed set of results only adds to that mixed story. While revenue is expected to rise from £661 million in 2017 to £670 million this year, the company says operating profit will decline to somewhere between £65 and £73 million – well down on 2017’s £96 million.

“Year-end cash is expected to drop to just £4 million, from £31 million; but there are also some relatively positive numbers in the forward book order.”

He added, “Is this a familiar problem brewing for a business that has had a troubled corporate past? It certainly could be if management doesn’t take action to restore profitability to industry averages while the housing market remains reasonable.”