There is much to like within this release and given ‘s (LON:) position as a preferred sector play, it is well positioned to reap the benefits of an improving backdrop.
The numbers themselves contain few surprises following a recent and detailed trading update, but they nonetheless show key metrics which are moving in the right direction across the board. Revenues increased by 16% to £3.2 billion against estimates of £3 billion, while underlying pre-tax profit of £395.1 million was 10% higher than the previous year and comfortably ahead of the £384 million consensus. Also on an underlying basis, operating margin edged higher to 14.1%, Return on Capital grew from 10.5% to 11.1% and operating profit spiked by 14% to £405.2 million.
At the same time, Persimmon has been strategically acquiring land to the tune of some £1.55 billion over the last three years. While this has in part had the effect of reducing net cash, which currently stands at £258.6 million versus a previous £420.1 million, the group’s historic ability to convert such purchases into higher margins and profits are promising signs.
In the meantime, a 7% increase in new home completions, coupled with a 5% spike in average selling prices has further fed into strengthening the balance sheet. At the present time, the group is maintaining rather than increasing the dividend, but the yield nonetheless remains attractive at 5.1%, with every possibility of higher returns to come. Part of the group’s strength lies in its ability to withstand any lingering build cost inflation, which had been a bugbear and peaked at around 10% a couple of years ago, although the figure is now significantly lower. In any event, Persimmon has the unique ability to manage costs through its ownership of brick, tile and timber frame factories which guarantees a cost-effective and resilient supply of building materials, where the group estimates that it saves £5500 per plot as a direct result.
Persimmon is also upbeat on its outlook, quoting a forward sales book of £1.15 billion which represents an increase of 27% and net private sales per outlet per week of 0.7 versus 0.58 in the corresponding period. In the first nine weeks of the current financial year, the rate of 0.67 is 14% higher than previously, and the group has set a target of between 11000 and 11500 completions in the current year, up from the reported 10664 in these numbers. In the middle term, Persimmon has set a target of 20% for both operating margin and Return on Capital Employed.
It is perhaps a little early to be calling a full recovery, but it is also fair to say that some of the previous headwinds are showing signs of turning into tailwinds. While affordability has been and could yet continue to be an issue, the recent interest rate cut clearly sparked the mortgage market into life, especially for first-time buyers where Persimmon has had a traditionally higher exposure. The imminent changes to stamp duty could also have brought some buying activity forward, although it remains to be seen whether that impacts the numbers on the remainder of the year.
More broadly, the group is also encouraged by the new government’s announcements on the sector in general, and particularly with regard to planning, which had previously hampered opportunities to growth. This agenda also demands more high-quality and affordable homes, which fits squarely into Persimmon’s natural business model. The proposed amendments will inevitably take time to wash through, although the group previously noted a bounce in planning permissions after the government took office.
One area where there is certainly scope for improvement is a share price which has declined by 14% over the last year as compared to a gain of 12% for the wider , and by 45% over the last three years. This has led to a lowly valuation by historical standards and there are signs that the sector could be due a re-rating, which would be of particular benefit to the group and where the warm initial reaction to these numbers could be a precursor of things to come. Meanwhile, Persimmon remains one of the more respected names within the sector and a preferred play. Indeed, given the undemanding valuation and ever-improving prospects, the market consensus of the shares as a buy is seemingly built on increasingly strong foundations.
