Persimmon profits swell thanks to earlier margin gains

Profit before tax of £516.3m from the first six months of the year was produced as underlying new housing operating margin swelled by 210 basis points to 29.7% and group revenues climbed 5% to £1.84bn. Housing sales volumes up 3.6% more homes and the average selling price increased 1% to £215,813.

The improvement of margins, which was significant compared to the first half last year but just 30 basis points from the secon half of last year, was said to reflect the "disciplined" investment in land, making quick start on new sites and exercising strong cost control, enabling it to reduce the land cost recoveries associated with legal completions and improve build efficiencies and overhead recoveries.

Chief executive Jeff Fairburn, who infamously took home £47.1m in pay and bonuses last year, pointed to a "resilient" market, with an average weekly private sales rate per site in the first half of 0.78 from an average of around 375 sites, in line with last year.

Current forward sales including legal completions since 1 July were 6% ahead of last year at £2.12bn, placing the group "in a strong position for the second half of the year". Just over 6,500 new homes have been sold forward into the private sale market with an average selling price of roughly £235,800, with around 100 new sales outlets are expected to be opened through the second half of the year.

Persimmon saw an increase in competition for land in a some locations but still spent £343m acquiring 11,072 new plots of land across 45 sites during the period This gave the group control of 101,445 plots as of 30 June, of which 51,112 plots are sites with detailed planning consent and are under development.

Basic earnings per share increased by 13% to 134.9p and there was no interim dividend declared, as 125p was paid in March and another 110p on 2 July as part of the capital return plan. Net free cash generation of £240.4m was down from the £284.5m in the first half last year.

With £1.15bn of cash held prior to July's £345m payment, Fairburn and the board committed to return surplus capital of at least 235 pence per share to shareholders each year for the next two years ending 2020, and 110p per share in 2021.

The board admitted that government policy "will play an important role in helping to create future market conditions that will allow the industry to continue to increase the delivery of newly built homes". The Help to Buy scheme has been a huge boon for housebuilder and is scheduled to remain in place until 2021, though the Chancellor is expected to announce some changes in his Budget this autumn amid criticism that it unduly benefits housebuilding companies and higher-income buyers.

Persimmon shares gained 1% to 2,467p in early trading on Tuesday.

Broker Shore Capital said that, as seen with other house builders, the comments and current trading and outlook "have a positive bent but the language is more constrained: firm, robust, supportive or resilient now replace the stronger adjectives we have seen hitherto".

Analyst Robin Hardy said housebuilders face a tougher time ahead without the benefit of high house price inflation, which is expected to begin to drag on margins. "Costs are going to be hard to recover with selling price inflation at around 1.25% (nearer 2% is needed to match the 3-4% cost increases) and that lower inflation also risks creating a mean reversion in margins: all house builders have been making higher margins than they had programmed for due to price rises and we estimate that there could easily be 200bps of such ‘windfall’ margin that will be hard to sustain.

"Therefore, we continue to believe that we are close to a peak in margins for this cycle and that, coupled with low selling price inflation, will make it hard for all house builders to achieve the profit increases now in the consensus."

Laith Khalaf at Hargreaves Lansdown agreed that, while things are still heading in the right direction, the pace of progress is slowing from the breakneck speed attained last year.

"This is a pretty healthy set of results by anyone’s standards, but clearly presents a backward look at performance. The future is not looking quite as rosy as the recent past however, with house price growth moderating and sales not as buoyant as they were."

With a "growing sense we are getting to the tail end of the housebuilding boom" and Persimmon shares standing around 15% lower than at the beginning of June, Khalaf said there was a bit of quandary for investors. "After factoring in its capital return plans, the housebuilder now comes with a yield approaching 10%, so shareholders face a difficult choice of whether to take the money, or run."