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Persimmon - Still confident

Nicholas Hyett | 22 August 2017 | A A A
Persimmon - Still confident

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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: 2,777.00 | Buy: 2,779.00 | Change -26.00 (-0.93%)
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Revenues rose 12% in the first half to £1.66bn, with house prices and volumes both improving. That supported a 30% increase in first half profits before tax to £457.4m.

The shares rose 2.7% in early trading.

Our View

Brexit negotiations add some uncertainty to the UK's housing market, but even in the face of gloomy data, the housebuilders have continued to report strong sales and high levels of interest. Persimmon's decision to expand its capital returns plan back in February is further evidence of its confidence.

There are many reasons why the market is proving resilient. Brits still want to own their own homes, the UK faces a major housing shortage and interest rates are at record lows, helping to keep mortgages affordable even as prices creep up.

Persimmon has also cited the benefits of the government's 'Help to Buy' incentives for first time buyers. Many of the schemes are designed to encourage the purchase of new-builds, which are accounting for an increasing number of transactions, relative to existing homes. That is providing the industry with a cushion the rest of the housing market lacks.

However, it would be foolish to think that the sector isn't vulnerable. Conditions that cause housing crashes can turn up at short notice, and in the past have had pretty nasty consequences for shareholders.

In particular, a rapid rise in interest rates would squeeze existing mortgage holders and likely see demand dry up, causing prices to slide. A rate rise of some description looks increasingly likely, although it's difficult to envisage them moving up more than 0.25 percentage points or so in the near term.

Fortunately, Persimmon has a stronger balance sheet than at the time of the last crisis, with a healthy net cash position. Its large land bank enables it to adopt a cautious approach to acquiring new plots if need be, keeping cash generation strong. It's also worth adding that the group has limited exposure to the London and South East markets, which some analysts have predicted could be at most risk.

Persimmon plans to return 110p per share per year out to 2021. This means the shares offer a prospective yield of 5%.

Half Year Results

Legal completions rose 8% in the first half, to 7,794, with the average selling price of a house rising 4% to £213,262. Rising prices and strict cost control saw the group's operating margin rise 3.8 percentage points to 27.6% and return on capital employed hit 47.3%.

Persimmon added over 9,000 plots to its consented land bank in the half, taking it to 98,712, including 3,308 converted from the strategic land bank (land held without planning permission).

The group currently has 355 active outlets, with sales running at an average of 0.8 per week per site in the first half. Although skills shortages remain a challenge, the group expects 25 sites to be released for sale in early September with 80 to open by the year end.

Current forward sales of £2bn are 15% ahead of last year, and trading since the financial year end has remained robust - with private sales 2% ahead of the same period last year.

The group remains committed to returning surplus capital of at least 110 pence per share to shareholders each July until 2021. This half the group paid 25p per share on the 31 March in addition to the scheduled payment.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.