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Persimmon - cashing in

Steve Clayton | 18 August 2015 | A A A
Persimmon - cashing in

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Persimmon plc Ordinary 10p

Sell: 2,782.00 | Buy: 2,784.00 | Change -10.00 (-0.36%)
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Persimmon's first half results reflect strong trading, with solid revenue growth, increased operating margins and a strengthening of the financial position. Profit before tax increased by 31% to £272.8 million, underlying operating margins progressed to 20.5% (2014: 17.7%) and cash balances totalled £278 million at the end of June (2014: £326 million), despite the group returning £291 million (95p per share) to shareholders under the Capital Return during the period. The shares were 1% higher in early morning trading.

Key highlights:

  • Total revenues increased by 11% to £1,332.5 million.
  • Legal completions of 6,855 new homes increased by 7% over the prior year with an average selling price 4% higher at £194,378.
  • Underlying basic earnings per share increased 43% to 78.6p.
  • Consented land bank increased to by 5.3% to 92,404 plots.
  • Return on average capital employed increased to 27.5% (2014: 21.7%).

Returns to shareholders:

The group aims to return £6.20 per share, or £1.9 billion of capital, to shareholders over a ten year period to June 2021. Total surplus capital of £2.40 per share, or £733 million, has now been paid. The fourth instalment is scheduled for early July 2016 and will be finalised with the full year results.

Current trading:
The private sales rate is 5% ahead of the same period last year with cancellation rates remaining at low levels. The current order book, including legal completions, is now 12% ahead of last year at £1.71 billion. 6,149 new homes have been sold forward into the private sale market which is 11% up on last year with an average selling price of c. £213,000, a 3% increase.

Nicholas Wrigley, Persimmon's Chairman, commented:
"The UK economic recovery continues to progress. With stronger employment in the UK being supported by further growth in job creation, the improvement in real disposable income over the last twelve months is helping to support and improve customer confidence. This creates a positive backdrop for the housing market across the regions…I remain confident of the future successful development of the Group."

Read more share research from Hargreaves Lansdown

Our view:

The housing market is being supported by rising disposable incomes, low mortgage rates and government schemes such as Help-to-Buy, which are encouraging more people to get onto the housing ladder. The first interest rate rise looks to be edging closer, but it is difficult to see rates rising significantly. The Bank of England will be wary of choking off the UK’s economic recovery by pushing rates too far, too fast.

Land prices remain affordable, which is supporting margins, cash flows and returns of capital to shareholders. However, there are signs that other cost pressures are starting to build. Bovis Homes said that material and labour costs were up 7% in its half year results, outstripping house price growth. There is nothing in Persimmon's half year results to suggest that costs are getting out of control, but this is something to watch.

With the house building sector trading at significant premium to book value, share prices are likely to be vulnerable when the next housing downturn arrives. Persimmon commands a price to book (P/B) ratio of 2.7x, which is around double its long run average and a 29% premium to the sector. For now, market conditions remain favourable, suggesting the house builders' purple patch could last a while longer.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.