Persimmon and Whitbread: Q3 results analysis

Persimmon

Challenges have, of course, been many and varied in this most cyclical of sectors. General uncertainty, mortgage availability and affordability concerns, slowing construction activity and pressures arising from increases to the likes of National Insurance and stamp duty are meaningful headwinds. Indeed, a recent construction survey confirmed subdued demand and fragile confidence towards the end of last year, even after the Budget passed by.

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That being said, there are a number of tailwinds which could yet revitalise the sector. More broadly, there remains a noticeable supply shortage of homes domestically, government reforms to planning should oil the wheels of being able to break ground, and the recent interest rate cut is a step in the right direction if not the ultimate goal, which should improve mortgage availability and affordability. At the same time, the group has noted that for some, inflation-beating pay rises and the relaxation of lending rules has led to higher enquiry rates.

In the meantime and for its part, Persimmon (LSE:PSN) is opening its strategic doors where possible. Over the first half, the group made £210 million of land purchases at what it describes as “excellent margins”, adding to one of the core parts of the investment case for the housebuilder, namely its land bank, which now stands at 84,750 plots compared to 82,000 previously.

In addition, the group operates three manufacturing facilities to make its own timber frames, bricks and tiles. It estimates that this saves around £5,500 per plot on building costs, and indeed there is now demand coming from elsewhere for its bricks in particular. At the same time, the group has launched its “New Build Boost” scheme in an effort to ease some of the affordability concerns of potential buyers.

In the meantime, home completions rose by 12% over the year alongside a 4% increase in the average selling price to £278,000. Forward sales grew by 2% to £1.172 billion, and the group expects to have net cash of £116 million at year end. This should protect the payment of a dividend where, even after being recently rebased to cater for the wider difficulties, a yield of 4.2% remains attractive.

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For the full year, Persimmon expects housing operating margin to come in at the lower end of the guided 14.2% to 14,5% range, although more promisingly pre-tax underlying profit should be at the upper end of the £415 million to £440 million range, then rising to between £461 million and £487 million the following year.

Investors have begun to factor in the potential turnaround in fortunes for the housebuilders, and as one of the preferred plays in the sector Persimmon has seen a particular benefit. The shares have risen by 31% over the last year, as compared to a hike of 23.3% for the wider FTSE100, including a jump of 25% in the last three months alone. From an investment and valuation perspective, however, there is plenty more gas in the tank. The shares remain down by 49% compared to five years ago and the market consensus of the shares as a strong buy reflects the renewed optimism.

Whitbread

It remains to be seen whether there is any kind of government backtrack from the additional pressure wrought on the hospitality sector through increased business rates. When announced at the Autumn Budget, Whitbread (LSE:WTB) shares slumped after the group estimated an additional hit of £40 million to £50 million, leading to between 7% and 8% inflation on its cost base, although that figure has today been reduced slightly to £35 million. Set against potential cost savings of between £75 million and £80 million (compared to a previously estimated £65 million to £70 million), the developments have clearly been taken as a positive.

In the meantime, the third quarter showed a number of potential inflection points. The Premier Inn UK business, which continues to do the vast majority of the heavy lifting for the group, saw an increase of 3% in revenue per available room (RevPAR) and of 4% over the last six weeks, with sales growing by the same amount.

The group is also introducing measures to fine tune profitability, such as looking at ancillary revenues whereby guests are able to pay extra for the likes of early check-in and late check-out, “Rooms with a view” and parking. Indeed, Premier Inn has become the largest hotel chain in the UK, with a 12% share of total hotel room supply. In relative terms, Premier Inn has consistently outperformed the market since the end of the pandemic and continues to do so.

Premier Inn Germany is also making all the right noises. The business is likely to contribute a profit for the first time over the course of this year, which would be an important milestone in a market which Whitbread believes to be an area ripe for the picking and a source of medium-term growth.

Further out, the aims are clear – by 2030, Whitbread expects adjusted pre-tax profit of £70 million emanating from Germany and what should then be 20,000 rooms. In the meantime, RevPAR increased by 7% in the quarter and by 5% over the last six weeks, where sales increased by 11% in that period.

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Whitbread is also refining its cashflow strength, with further sale and leaseback operations on nine hotels for £89 million. Meanwhile, the £250 million share buyback programme is ongoing and £217 million complete, while a dividend yield of 3.8% provides a further attraction as the group continues to target shareholder returns.

Much has been done, but there remains much to do, although the positive reaction to the update is a step in the right direction. The share price has suffered in a tough environment, falling by 10% over the last year, as compared to a gain of 23.3% for the wider FTSE100, and by 29% over the last two years. Even so, this long-established and well-regarded company continues to attract the support of investors with the market consensus holding steady at a buy, although it is increasingly clear that patience will be required for the long haul as it moves through its five-year transformational plan.