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Persimmon - profit tops 1bn

George Salmon | 26 February 2019 | A A A
Persimmon - profit tops 1bn

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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: 2,507.00 | Buy: 2,510.00 | Change -9.00 (-0.36%)
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Underlying profit before tax rose 13% to £1.1bn in 2018, thanks to higher completions and improved margins.

2018's shareholder returns were 235p per share, a 74% increase on last year.

The group also announced interim CEO, Dave Jenkinson, has been appointed Group Chief Executive, following Jeff Fairburn's departure in November.

Shares rose 1.5% in early trading.

View the latest share price and how to deal

Our view

A few warning signs are flashing in the housing market, but the government's 'Help to Buy' incentives are providing an extra tailwind to the builders. As a result, Persimmon is bucking the trend with strong sales and high levels of interest.

Many of the schemes are designed to encourage the purchase of new builds, and close to 50% of Persimmon's buyers benefitted from Help to Buy. This, plus a structural housing shortage tips the supply/demand equation in the builders' favour. And low interest rates and unemployment levels provide a generally supportive backdrop.

Add in the group's enviable operational record - margins have topped 30% - and it's easy to see why the shares trade on 2.3 times book value, a premium to its housing peers.

But sands are shifting. Help to Buy is set to run to 2023, but Persimmon's participation in the scheme is facing scrutiny. The government is said to be concerned about its use of controversial leasing fees, and poor quality builds. We'd be surprised if Persimmon was prematurely taken off the Help to Buy list, but with wider economic uncertainty looming, it's a worry it could do without.

Brexit remains the main worry. Concerns have already seen prices stagnate and transactions slow. Those trends could worsen in a harsh Brexit, and if that's the case, it's hard to see the builders' profits being sustained.

Perhaps mindful of how its debt-laden balance sheet exacerbated troubles back in 2008/9, management have ensured its foundations are strong. Persimmon has a deep land bank for future development and has built up a huge net cash position.

That means the group can return most of its free cash flow straight to shareholders through special dividends. We think this policy, rather than stock repurchases or M&A, was the right call.

Those extra dividends also mean the shares yield 10%. Attractive, especially since the payments look secure in the short term.

Investors shouldn't extrapolate the dividend too far into the future though. Support from Help to Buy and low interest rates won't be around forever. Persimmon's doing very well with what is has, but time will tell what Brexit means for the housing market.

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Trading details

Group revenue increased 4% to £3.74bn, with completions up 2.5% to 16,449 and average prices up 1% to £215,563. That includes a change of mix, which saw fewer larger homes being built.

Underlying operating margins rose to 30.8%, from 28.2% last year, following the use of new build efficiencies.

Forward sales were broadly flat with last year, at £2.02bn. Spring sales rates are lower than at this time last year, but with a higher proportion of releases due later in 2019, the group's confident of hitting this year's targets. However, it remains mindful of Brexit uncertainty.

Persimmon acquired 17,092 plots of land, across 84 locations. The number of plots with planning permission stands at 47,300 - a 10% decrease on last year.

A higher dividend, and the timing of payments to suppliers meant net cash decreased slightly to £1.1bn (2017:£1.3bn), however land creditor obligations decreased by £19.3m.

An interim dividend of 125p will be paid on 29 March, to those holding shares on the 8 March. A final dividend of 110p will be paid on 9 July, to those on the register on 14 June.

Find out more about Persimmon shares including how to invest

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 disclosure for more information.