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Boom times continue for Persimmon

Persimmon built more homes in the first half, and forward sales are up 15 per cent.
July 8, 2015

Business is booming at housebuilder Persimmon (PSN), with legal completions up 7 per cent in the first half. Demand has been supported by increasingly competitive mortgage rates, rising employment and growth in consumers' disposable income.

IC TIP: Buy at 1,981p

What's new:
Legal completions up 7 per cent
Strong cash generation might herald dividend rise
Higher selling prices more than offset cost inflation

The weekly rate of private home sales rose 11 per cent from a year earlier. Average selling prices were also higher by 4 per cent, at £213,000, while the pipeline of forward sales grew by 15 per cent to £1.36bn. Raw material cost increases have moderated, but there is continued pressure on labour costs, notably for bricklayers. However, overall cost inflation of around 3 per cent is more than covered by rising average selling prices.

A total of 122 new sites were opened during the first half, up 5 per cent from a year earlier, with a further 125 new sites set to open in the second half. To cater for the increased output, Persimmon has bought 11,500 new plots of land, taking the consented land bank up to 92,400 plots. Cash generation remains impressive, with the company's cash holdings reaching £278m at the half-year point. The group is on track to return £1.9bn to shareholders by 2021.

 

Bank of America Merrill Lynch says…

Buy. Persimmon remains attractive, with the shares currently trading on a 2016 forecast dividend yield of 5.5 per cent, above the sector average. With such a strong cash conversion rate, we think the full-year dividend for 2015 could even be raised to 100p a share. There will still be plenty of cash available to fund land purchases, but even after this we estimate that the group could complete its targeted dividend payout three years earlier than 2021. In fact, a moderation in land acquisition opens the possibility of the dividend payout being substantially higher than previously planned. For the year ending December 2015, we are forecasting adjusted pre-tax profits of £566m and EPS of 145p (from £475m and 124p in 2014).

 

Shore Capital says…

Hold. New site openings are back on track after some delay as the planning process froze ahead of the general election. The valuation looks a bit stretched, with the shares trading above our fair value estimate of 1,823p and on a price-to-net-tangible-asset multiple of 2.85. We are sticking with our hold recommendation largely because of the high dividend yield, but as the shares have risen sharply in the wake of the unexpected general election result, there can be no harm in taking some profit at this stage. We are not changing our forecast for pre-tax profits of £581.5m this year.