■ Strong cash flow
■ Six-year land bank
■ Selling prices up 8 per cent
Persimmon is the only major housebuilder that did not resort to a rights issue to support its balance sheet through the housing downturn. In fact, strong cash flow has helped the housebuilder to reduce net debt from £494m a year ago to just £122m or 7 per cent gearing - well below its main rivals.
Legal completions in the first six months of the year rose by over 16 per cent to 4,657 homes, and with selling prices up 8 per cent at £168,500, this helped to boost half-year turnover by 26 per cent to £785m. Inevitably, reservations slowed around the time of the General Election, although cancellations remain in line with expectations at 16 per cent.
The group has invested in new site openings in anticipation of the normally stronger housing market in the Autumn, although management is retaining a cautious stance on investment decisions until mortgage availability improves further.
Chief executive Mike Farley also warned that planning issues remain a concern, partly as a result of the disruption caused by a move towards more localised planning. "Land allocations are being slowed as the transition takes place", he added.
Buy. With 90 per cent of this year's sales target already locked in, Persimmon is in a strong position. Debt levels have been reduced, and depending on land purchases in the second half, strong cash generation could see debt all but eliminated. On the sales side, there remains a risk of a slide back if economic growth slows, but this is insufficient to justify the significant discount in the share price to net asset value. For 2010, we are expecting pre-tax profits to recover sharply from last year's £61.6m to £150m, giving a diluted EPS of 21.5p.
Panmure Gordon says...
Buy. Persimmon's half-year trading statement included a rise in completions, prices and margins along with a further reduction in gearing, which leaves the shares looking undervalued at current levels. Revenue at the half-year was up from £1.317bn at £1.5bn, while margins have improved sharply to 7.5 per cent. This is the same as our forecast for the whole year, although this might be a touch conservative. The group has also added 4,000 plots to its landbank at attractive margins. There is some cloud over mortgage availability, but the shares still look cheap against a forecast NAV of 555p. Expect EPS of 18.17p.