Persimmon's hidden value

Housebuilders are more vulnerable than most to changing economic cycles, making lots of money one year, and losing lots the next. However, there remains one constant throughout any cycle, and that is land. Mark Twain's observation, "Buy land, they're not making it any more", may have cliché status, but it still rings true. And Persimmon has lots of housing land.

Let's roll out some figures to illustrate this. During the first half of 2010, Persimmon sold 4,657 homes at an average selling price of £169,000, but it had a land bank of building plots owned or under the group's control totalling 58,957. Now, of course, land values can fluctuate sharply and, in the past, more than one housebuilder has been caught when house prices started to fall while land prices were still rising. That's why Persimmon had to write down the value of its land bank and work in progress by £710m in 2008; but then it added back £75m last year as land values stabilised.

Looking from a different angle, Persimmon reckons that its total inventories at the half year were worth £2.16bn. That's mostly housing land but includes work in progress as well as show houses, and works out at 715p a share. More important, deduct all of the group's liabilities - debts, provisions, the lot - from that figure, add on Persimmon's £129m of cash and you are left with almost £1.2bn of net housing assets, or 389p per share. That calculation ignores Persimmon's £461m-worth of longer-term assets and shows that the share price at about 400p is underpinned by lots of real assets.

Of course, the land bank can't be turned into cash quickly - at current rates of build, it would take the group over six years to use up its land bank, assuming there were no further land purchases; but it does put Persimmon in a very strong position. And while there are headwinds facing the UK housebuilding industry - most notably unemployment worries and restricted mortgage availability - Persimmon has managed to adjust its construction mix away from flats towards traditional family houses, where demand has held up better.

And this has been instrumental in boosting its order book from £638m in June 2009 to £912m this June. This meant that by the end of June around 95 per cent of 2010's planned sales had been covered. What's more, there were a further 1,700 homes reserved for sale in 2011.

Running a much tighter ship has brought benefits to the group's financial health. Cash inflows in the first half of £186m helped reduce net debt to £122m, while net finance costs were cut from £27m to £23m. And, with build costs firmly under control, profit margins have recovered markedly. Furthermore, shareholders received a nice surprise with the return of dividend payments at the half-year. That said, the muted payout will produce only an uninspiring yield even if the company meets City expectations for a full-year payout of 6.5p per share. At least restored dividends are a sign that Persimmon's bosses are confident about the group's finances, even if trading stays tough.