Persimmon: signs of increasingly stable foundations

While these numbers don't shoot the lights out, there is clear evidence that Persimmon (LSE:PSN) continues to propel those levers within its control.

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The sector is highly cyclical and the current UK economic backdrop is unstable. General uncertainty, mortgage availability concerns, slowing construction activity and pressures arising from increases to the likes of National Insurance and stamp duty are meaningful headwinds.

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. 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 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. This now stands at 82,504 plots, which gives some idea as to the potential scale of future profits and the group’s historic ability to convert such purchases into higher margins and profits are promising signs.

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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.

As a result of its actions, there are signs of increasingly stable foundations. New home completions for the period increased by 4% to 4,605, such that the group has reiterated its full-year target of between 11,000 and 11,500 homes and indeed 12,000 the following year. The average selling price of these new homes spiked by 8% to £284,047, while its forward sales position also drove higher to £1.25 billion from a previous £1.12 billion, suggesting some growing momentum.

Revenues for the group as a whole were 14% higher at £1.5 billion, ahead of expectations of £1.37 billion and adjusted pre-tax profit rose by 11% to £164.9 million. Underlying return on capital also improved to 11.2% from 10%, and the dividend was maintained, protecting an attractive 5.3% yield, which effectively leaves shareholders being paid to wait amid these turbulent times. The outlook was maintained for the year as a whole, including operating margin of between 14.2% and 14.5%, en route to its 20% medium-term target.

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Even as a preferred play within the sector, Persimmon has been hamstrung by the wider factors over which it has little influence, including but not limited to a faltering domestic economy. As a result, the share price fall of 28% over the last year, which compares to a gain of 11% for the wider FTSE 100, brings the decline over the last five years to 54% as the group struggles to recover former glories.

The initial share price reaction also reflects some exasperation that progress is perhaps not accelerating quickly enough. However, by the same token this has left the shares on an undemanding historic valuation which, alongside the group’s particular order book and land bank strengths leads to a market consensus of a strong buy, especially with the longer term in mind.