Can Persimmon banish post-Brexit gloom on housing?

Tuesday, 23rd August 2016 14:04 - by David Harbage

The announcement of national, volume residential builder Persimmon’s interim results this morning cheered the City as both the numbers and comments on the immediate outlook for new housing beat analysts’ expectations and bucked prevailing, mixed sentiment towards the industry.

The numbers themselves maintained the company’s high reputation as a prudent operator, with a focus on enhancing short term shareholder value (by maximising return on invested capital) as much as the operational aspects of maintaining the longer term business model (of replenishing its stock-in-trade of land). Post-Brexit fears of a ‘buyers’ strike’ are proving to be unfounded; housing remains an essential part of life and, with the cost of the prime alternative rising (rents increased by 2.3% across the UK, and 4% inside the M25) and mortgage rates falling (10 year fix under 3%) in the first seven months of 2016, home buying is unlikely to dry up.   

In the first half of this year, Persimmon produced a 29% increase in pre-tax profits (to £352.3m) on a 12% rise in revenue (to £1.49bn) – as completions and average selling prices were 6% higher than the first half of 2015 (at 7,238 homes and £205,762 respectively). Operating margins rose from 20.5% to 23.8%, featuring good control of costs (little exposure to London labour rates), and return on capital employed (ROCE) was up from 27.5% to 29%. Land was replenished, via 7,108 new plots (with 40% of these converted from its strategic land bank), taking the consented land bank to 93,519 plots (plus 17,500 acres of strategic, potential for permission, land). Net cash of £462m in the bank was up from £278m, after making a £338.3m payment (special return of surplus capital) in April. The latter, worth 110p per share, is set to be repeated each year until 2021.

However, management’s advice of the group’s post-referendum trading pleased the market most and rebuffed some commentators’ concerns – revealing site visitors and reservations since 1 July were 20%, and 17% respectively, ahead of the same period last year. A significant amount of effort was given to addressing investor concerns of a slowdown in build activity and a drop in selling prices, as chairman Nicholas Wrigley commented at length on the company’s current strategy (raising ‘hurdle’ rates on land buying) post Brexit, as well as the health of the wider market. For example, the development of four new business units in Perth (for north Scotland), Launceston (Cornwall), Castle Bromwich (Central) and Stockton (Teeside) are set to deliver 1,600 homes over the coming year – and create 6,500 jobs – was highlighted. As was the benefits of a large builder’s scale: in the form of cost efficiencies in land purchase, construction efficiencies and overhead recoveries. Bottom line message reiterated careful management – of what is undoubtedly a cyclical industry - to ensure a sustainable business and consistent returns to shareholders.

The prospect of further HM Government support for new build in the Autumn statement from a new Chancellor – to address the marked shortfall in supply of housing over demand – is likely to aid further recovery in sentiment and share prices within the sector. In addition to such stimulus measures (revisit stamp duty, establishment of a HMG fund), there might also be some progress announced insofar as the UK’s relationship with the European Union is concerned (outline plans surrounding trading terms versus access to market and freedom of movement – perhaps leading to a deal akin to the Swiss one). Clarity in that area would also buoy sentiment towards segments of domestic industry which appeared to have been written off post the 23 June decision. Persimmon’s update today should lead to earnings upgrades from brokers, underpinning equity valuations (post today’s 4% rise in the share price to 1866p at the time of writing, current forward-looking PE ratio is 10.7 times calendar 2017 forecast profits, offering a 6.3% dividend yield) and reassure worried investors who bought into ‘project Fear’ – across the sector. Share prices advances today in other peers, such as Barratt Developments, Bellway, Bovis, Countryside, Crest Nicholson, McCarty & Stone, Redrow and Taylor Wimpey, suggest it can; with London-biased operators Berkeley Group and Telford Homes also enjoying stock progress.             

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.