Persimmon builds up solid six months, profit margins impress
Persimmon’s profit before tax surged in the first half of the year as sales improved but profits margins leapt higher thanks to strong cost control.
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Pre-tax profits surged 30% in the six months to 30 June, the FTSE 100 housebuilder reported on Tuesday, to £457.4m, off revenue of £1.66bn, which was up 12% year-on-year.
Legal completions during the period were 8% higher at 7,794, which meant an additional 556 new homes were delivered, while the average selling price increased 4% at £213,262.
Persimmon further expanded its underlying operating margin by 380 basis points to 27.6%, while its return on average capital employed increased by 33% tp 47.3%.
A total of 9,319 plots of land were secured in the period, bringing Persimmon’s consented land levels back up to 98,712 plots.
“The successful execution of the group's long term strategy continues to support excellent trading results as seen again in the first half of 2017,” said group chief executive Jeff Fairburn.
“Our focus on meeting market demand to deliver high quality sustainable growth in each of our 29 regional businesses is delivering excellent outcomes for our customers, our shareholders, and all our stakeholders.”
Net free cash generation stood at £284.5m in the period, and the company had net cash of £1,120.4m on 30 June, before it spent £339.5m on a capital return on 3 July.
Basic earnings per share were up 30% at 119.5p, while the company’s current forward sales were 15% ahead of last year at £2.005bn.
Persimmon returned £77.1m of its surplus capital at 25p per share on 31 March, in addition to the scheduled 110p per share payment, totalling £339.5m, distributed on 3 July.
The company’s board reiterated its commitment to return surplus capital of at least 110p per share each July until 2021.
“The market remains confident,” Jeff Fairburn said, adding that “customer interest in our developments remains strong with encouraging levels of interest through both our websites and our sales outlets as we trade through the quieter summer weeks.
“Our private reservation rate over recent weeks is c. 2% ahead year on year. Whilst we remain vigilant to changes in market conditions we also recognise we are in a strong position to take advantage of opportunities that arise. We are looking forward to a good autumn sales season.
“With a high quality land bank, very strong balance sheet and excellent forward sales the group has built a platform for its future success,” Fairburn explained.
Persimmon shares touched a new all-time high of 2,650p in early trade on Tuesday and by mid afternoon were up 1.3% to 2,590p.
Broker Numis said the half year results were better than expected due to the "very substantial" increase in its EBIT margin, up 380 basis points to 27.6% reportedly driven by a tight control on development and administration costs - with further benefits expected to accrue from lower land costs in the future.
"In our view this highlights the operational capabilities of the group and the strength of land holdings," analysts wrote, lifting their target price to 2,716p, noting that Persimmon confirmed that it is committed to a return of cash to shareholders of at least 110p/pa – with the term “at least” introduced for the first time.
Hargreaves Lansdown felt the results had "a bit of swagger about them" despite the slowdown in the UK's economic growth.
"The UK housebuilding sector is still sitting pretty, with interest rates staying low, the Help to Buy scheme supporting demand, and a lack of supply helping to boost prices. However the recent scare over the early withdrawal of Help to Buy demonstrated that the sector is vulnerable to a correction if one of those tailwinds suddenly disappears.
"For the time being that looks unlikely though, and policymakers will think twice about withdrawing support from the property market, as falling house prices don’t tend to draw cheers from the crowd."
Analysts at Canaccord Genuity called it a "stellar" performance, with PBT around 5% ahead of expectations mainly due to the strong margin performance.
The balance sheet also came in for praise, with net cash coming in a bit better than expected at circa £1.1bn, despite continued growth in the land bank, while the ROCE impressed at circa +47%.
"Comments on recent trading are reassuring with reservations up by c.+2% over the last seven weeks with management looking forward to a good autumn selling season," analysts said but added that the share price was in line with its price target.