Persimmon: room for cautious optimism

Housebuilder Persimmon has sensibly maintained a cautious stance on the prospects for the housing sector this year, given the scarcity of mortgages, a squeeze on personal income and rising unemployment. However, trading in the second half of 2009 has at least allowed room for some optimism. In a pre-close trading statement ahead of results on Tuesday 2 March, the company announced that sales rose from 4,006 units in the first half to 4,970 in the second half, and by concentrating on improving cash flow, net debt has been reduced from a peak of £1.2bn in April 2008 to a much more manageable £270m.

The depressed nature of land prices has thrown up a number of bargains and Persimmon acquired 3,000 plots towards the end of the year, some 80 per cent of which are in the south of England. The land bank now stands at 61,000 plots, which based on last year's output is equivalent to 6.8 years of production. Persimmon also has £45m to utilise on shared equity sales under the government's HomeBuy Direct scheme, and a further £50m has been secured from the Homes and Communities Agency as part of the Kickstart 2 incentive. The funds are expected to provide assistance for up to 5,500 first-time buyers.

CITI SAYS...

Buy. Persimmon has reduced debt by more than was expected, while forward orders are up 40 per cent from last year's depressed levels. The latest trading statement gave no guidance on margins, but these are expected to remain under pressure as a result of continued use of incentives. There were also no details on potential writebacks, but as property values improve, there could be as much as £300m written back over the next few years, equivalent to around 100p a share on net asset value. Trading at under forecast net asset value for 2010, the shares look undervalued. Expect pre-tax profits of £40m and a loss per share of 4.7p last year, rising to £148m and EPS of 20.8p in 2010.

BANK OF AMERICA MERRILL LYNCH SAYS...

Buy. On our estimates, Persimmon could be virtually debt-free by the end of 2010, and we also expect the housebuilder to announce further writebacks on the value of its land bank. On the trading front, reservations held up well in the normally quiet November/December period, rising 14 per cent year-on-year in the final six weeks of 2009. What's more, average selling prices rose by around 3 per cent in the second half, reversing a 4 per cent decline in the first half. The group currently has 370 outlets, but could bring a further 90 into production if the all important spring selling season goes well. Expect 2010 pre-tax profits of £38m and EPS of 9p.