Over the past two to three years the housebuilding industry has faced strong headwinds. The sector is notoriously cyclical. It thrives on low unemployment, low interest rates, and decent mortgage availability. But the unemployment rate is now at 7.8%. And with public spending cuts looming, it looks set to grow.
Interest rates are likely to rise too, given inflation continues to overshoot the Bank of England’s target. And in mid-August, the Council of Mortgage Lenders cut its forecast for total mortgage lending in 2010 by £10bn. The government is also proposing changes to the planning laws, transferring more power to local communities, which risks making building plots more difficult to develop.
City analysts were clearly encouraged by the interim results to 30 June. Persimmon reported underlying pre-tax profits of £39.4m against a loss of £16.7m in the first half of 2009. This was largely driven by rising completions (up 16%), higher average selling prices (up 8.6% to £168,936), and reduced building costs (down 14% from their peak). These all boosted the operating margin from 1.6% to 8%. Meanwhile, Persimmon has achieved 95% of its sales target for 2010.
Persimmon (LSE: PSN), rated a BUY by Arbuthnot Securities
However, following a period of strong sales through the spring, housing-market activity has slowed as mortgage availability continues to be constrained. The firm’s forward p/e ratio of 17.2 for 2010 looks toppy. Persimmon is covered by 15 City brokers. Of these, only six rate it a ‘Strong Buy’. Investors should continue to be wary of the sector until the macro-economic picture becomes a great deal clearer. Avoid.
Recommendation: SELL at 378p
Nigel Milton is an advisor to the Lacomp British Enterprises EIS Funds and the Sparta EIS Film & TV Fund and a former editor of Investing for Growth.