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Blazing - some information on interest rates. You mix up inflation and interest rates.
1. 10% inflation and 5% interest rates mean a real interest rate of minus 5%. Mortgage rate increases have less of an impact on households provided they are around wages growth levels.
2. Real House prices will fall in that for a while they have outstripped inflation by nearly 10% per annum . Not unreasonable that the growth falls to 3%. That's a real terms fall of 7%.
What does that mean for PSN.
- profits squeeze as housebuild inflation is 10% and house prices 3%. Margins fall from 28% to 22%. Profit by 25% - that's allready priced in.
- no impact for a year as 90% of the book is forward sold.
- there's chronic under supply of housing. Central government policy andvbanks will protect against evictions only as a last resort. That will constrain supply
- PSN at bottom end of market and benefits from those who I agree can't afford a 350k mortgage lowering there sights to a 200k mortgage
- inflation is transitory two thirds is energy related and $100 Brent and 400p a therm is baked in. If that doubles which won't happen yes inflation will be up another 10% in Aug 23. It won't and we will be back to 5%.
The maco economic picture is some real pain over a short period but for a softish landing.
Against that backdrop PSN and all builders are a steal at this price.
PSN could cut divi to nil this year leaving a £1bn chest to fight a deep recession or the landing is soft and we have a reduced divi 25% or so for a year before normal service is resumed.
Completey happy here
Blazing, I concur it is a ticking time bomb!
Not really relevant if you hold for 10 years and top up on the lows.
A forward thinking stock market can see interest rates are nowhere where they should be , GBP/USD 1.18 and falling inflation at 10%, rates must and will go up a lot. What effect would 5% plus interest rates have on the housing market at these ridiculously high levels.Timberrrrrrrr is the only outcome.
It’s so obvious.
Let them talk, we can buy at silly prices.
The paranoid selling of Persimmon is ridiculous and this too will pass. We are a solid, vertically integrated builder, with no debt, on an island with a finite supply of properties selling to a population gagging for houses ... and they aren't going to touch the dividend. I wish the fear mongers trying to talk us into a recession would just crawl back into their holes and mope amongst themselves.
The other side to this is that the house market isn't falling back, Persimmon now have over 8,000 sites to develop, the share price is half that of a little over a year ago and the dividend even if halved comes in at over 6%. Each to their own but I will happily walk my average down at these prices. An announcement of a dividend around 8% would see this well over 20 again, I'd expect to see a steady rise through to the declaration date.
The only reason margins haven't slipped is because of the giant elephant in the room going forward....property and land prices. Most pundits now agree with their crystal ball that we will see a drop in prices over the next year or 2. However one doesnt need to be mystic Meg to see the obvious.
They have already began to start dropping back, but we havent seen any effect on a declining property market reflected in earnings yet. Margins will crumble to dust once the decline gets into full swing and this starts to be reflected in earnings.
A huge land bank will not look so attractive in this situation, especially considering PSN have purchased at peak recently. Cash on the balance sheet would have looked more attractive in these times than swathes of land at artificially high prices despite inflation chomping away at cash piles.
Dividend cover is already miniscule and revenue/profits already declining. You have to ask yourself how much longer is a 13% dividend yield really viable? Any cut in divi will decimate the SP.
Sure the divi looks attractive, but I'm not getting lured by it despite the temptation. There are much better divi players out there offering very attractive and realistic yields (c7%) without the risks of being cut to at least claw back some losses through inflation. LGEN being one. As the old saying goes; if it is too good to be true...it almost certainly is.
Paul,
By "range trading" I'm taking it that you move between house builder shares & cash...?
For myself, in twenty two years in this game, I've remained fully invested throughout, with the exception of largely swerving the covid tsunami....
I agree that some house builder balance sheets now are very different to those of the credit crunch... by "some" I mean notably Taylor Wimps and Barratt, who were both in existential risk if they hadn't got their rights issues away back in the day and though they survived they still have some way to go for shareholder recovery.
Don't tar them all with the same brush, though ~ Bellway have always operated with a strong balance sheet and, as ever, are currently best in class.... ironic seeing as it's only Crest, of the builders I track, currently enjoying a lower PBV...
If the market was rational, you'd expect some brownie points for safety, wouldn't you, especially through these dark & uncertain times...?
I am pretty much a 100% rear view mirror investor ~ I have a lot of faith in Mathew 7.16, and all that (though, don't get me wrong ~ I certainly ain't religious..!) and, for me, the cold marble slab of truth is the numbers.
So, I don't really connect with a lot of the potential why's and wherefore's discussed by others in these share chats ~ as far as I'm concerned, it all comes out in the wash in the end with the numbers....
And on this, I pretty much disregard declared earnings, and P&L accounts generally as being great works of fiction, and instead work from balance sheet to balance sheet, calculating tangible book value per share and adjusted for dividends paid to get to the true EPS.
The great thing about balance sheets is that if you fiddle a value one year, you have to keep fiddling that value just to keep things straight ~ no “adjusted earnings” malarkey allowed..!
But of course, we can't see the future, so we have to rely on the past...
Well, at least, I do...
One thought on this land bank advantage for Persimmon, though ~ if there's less growth for the company, which there is in Persimmon’s case, at any given time the existing land bank will last longer...
Persimmon's turnover increased by only 75% from 2013 to 2019, whereas Bellway's turnover increased by 190%.
So, while I'm not suggesting that this happened, if Persimmon did happen to have a land bank bought at wonderful margins, one way to spin that out longer would be to restrict the amount they used every year...
Wouldn't it...?
Especially as, in these pages at least, no-one else seems to be picking up on the consequential lack of earnings growth…?
So, as far as the share price goes, clearly, they are getting away with it...!
Strictly
Strictly
I’m loathe to compare historic P/B since so many other factors. You may have seen Morgan Stanley’s recent note The Big Bad Wolf? Their bear case for TW is 55p but imo their analysis is ludicrously flawed because they assume a P/B similar to past cyclical lows when HB’s were billions in debt (and required heavily discounted rights issues to survive) versus now when the HBs are sitting on shedloads of net cash. This is why I’m invested in all the HBs although I am range trading.
Re PSN margins, they have been criticised for not land buying during CV-19 and are now playing catch up at presumably less attractive prices. They are also suffering because HBs need a large pool of plots to navigate planning uncertainties.
Are their margins good because focused on the lower end of the market, maybe less competition and the building plot a smaller % of the overall cost?
Also are they able to make superior planning gains from change of use. eg upmarket HB’s such as Redrow more at risk from NIMBYs.
Maybe they are much more conservative in valuing their land bank?
PSN have sector leading margins but how will they maintain this as they deplete their historic land bank and build out more recently acquired land?
..........................
Paul,
Persimmon have maintained sector leading margins for a decade...
I am not an investor in Persimmon, and have been watching from the side-lines waiting to see if their margin slips ~ which it hasn't so I now allow that they may just have an overall business model that gives a better bottom line..?
However, as you say, they trade at a premium to net asset value well over and above that of the other house builders, particularly the ones I am invested in, being Bellway & Redrow.
Their price to book remained at around 3.0 for years before the recent slide, and even now it's still around 1.6 against the other two who are both below par.
Almost certainly, the high PBV is driven by the big div ratio paid out as well as the high margins.
This presents two problems.
At a PBV of 3.0, two thirds of the shareholder asset value evaporates on paying the dividend ~ i.e. a 6% of book value paid as dividend is experienced as only a 2% yield.
And because Persimmon are paying out a far bigger percentage of their very impressive earnings as dividend ~ around 80% against Bellway & Redrow 33% ~ there's far less retained earnings for growth.
So while, at any given moment, Persimmon's metrics may look wonderful, their earnings per share growth is a giveaway if you pay attention to the longer term going back...
From 2013 to 2019 (let's keep this pre-covid) Persimmon doubled their EPS from 122p to 253p, whereas Bellway quadrupled theirs from 103p to 437p.
And, furthermore for me, being a wussy investor, the forty years of track record I have details of for some of these house builders shows purple patches and sticky patches for price to book values for them, some quite enduring even though the underlying performances may not have warranted these one way or the other...
And my fear is that, at some point, Persimmon reverts to a more standard PBV in line with their superior div payout on the one side but their inferior growth on the other.
That would require more or less a halving of share price from here, relative to Bellway.
And I’m no hero…
Strictly
Paul your a ray of sunshine Ivestec halfing dividend ( other analysts think it will be held) now terminally decling margins due to land bank.
Margins are a factor of the cost of land when acquired so probably a three year + lag.
PSN hold similer stocks to others and spend £400m this half year - double the comparative.
None of the builders sight this as a concern.
Main concerns are common to all builders
- materials inflation - PSN well placed as own supply chain
- house prices - PSN protected to a degree as bottom of market. In particular rising rents rather than interest determine decion to buy on first time buyers.
- planning permission particularly on environmental issues. Common to all.
You seem to not be keen on PSN but have come up with no company specific information to support that view.
This is a great price and if the 2023 dividend halves I will buy Paul Curtis a pint. No one really know but Rupert Hargreaves has it being maintained.
Great price to get in but also like other builders
PSN have sector leading margins but how will they maintain this as they deplete their historic land bank and build out more recently acquired land? They didn’t buy cheaply during Covid when TW did.
Also PSN is one of the few HBs trading at a premium to NAV. I hold all the HBs but prefer TW and Vistry. Sold a large chunk of into Redrow into recent spike.
Persimmon is still building on land that they have held for over 25 years so how much will that take the price of a house down? Also they are now making people sign up to their internet company for two years when they move in. I was told it was going to float on the stock market last year but still haven’t seen it yet, if you spot Fibrenest that’s persimmons own internet provider company.
45 percent of the cost in building a house is the land. persimmons added lots of plots. In fact enough added (to existing) to cover their requirements for the next 5 years . A forward and sensible move. Then they have increased their capacity to make bricks, tiles and frames, again a great move. They may now not have as much money in the bank but with inflation I would rather they used the money to reduce future costs (as they have done). I don’t take to much notice of what analyst forecast. I use my own eyes, listen to the news etc and I recon land prices will go up (inflation) and there is a massive requirement for homes, like the ones Persimmon build. My opinion, dividend will stay the same, people will realise and share price will rise. Good luck to all!