Persimmon has tentatively convinced the market that the worst is behind it. Shares in the housebuilder have rallied by more than a quarter over the past month.
Better sentiment has been prompted by hopes that demand is stabilising. The sales rate improved in the five weeks since the end of September to 0.59. That is higher than a weekly rate of 0.48 in the third quarter.
Yet some of that is thanks to bulk sales to institutional investors. Strip out those and the ex-bulk sales rate comes in at 0.46, Barclays points out, which meansthat the uplift is less pronounced than it might seem at first.
The wider economic indicators are mixed. Interest rates may have stabilised, which is promising for mortgage affordability, yet transaction volumes across the market are still falling. In October, those were down by 17 per cent year-on-year and were 2 per cent lower than September, according to HM Revenue & Customs.
The picture on mortgage approvals is a better indicator of future demand. Approvals were 8 per cent higher in October than in the month before, according to data from the Bank of England, the first rise in three months. But the health of demand is far from back to normal. The volume of approvals is still about 28 per cent lower than the five-year average.
The outlook for margins is not good. Persimmon expects completions to fall to 9,500 this year, down from just under 15,000 last year. Average sales prices have remained more stable, up 2 per cent in the latest quarter, but cost inflation is expected to be between 8 per cent and 9 per cent across the year. Analysts at Peel Hunt have forecast an operating margin of 13.7 per cent, down from 26.4 per cent last year. That improves to only just over 14 per cent over the next two years.
A booming housing market during the pandemic provided a cushion for housebuilders entering a tougher trading environment this year. That is not a luxury they will have going into the new year.
Forward sales amounted to £1.62 billion at the end of September, equivalent to just over 60 per cent of next year’s consensus sales forecast. That is down from 84 per cent at the same time last year, when forward sales equated to £2.09 billion.
Persimmon has the most spare capacity across its sites of any UK-listed housebuilder, according to analysis by RBC Capital, measured by projected volumes this year versus the potential homes the group could build across its sites.
Despite the recent rally, Persimmon’s shares have still fallen by more than half since the start of last year, a comedown brutal enough to kick the group out of the FTSE 100. The issue is whether the added uncertainty has been adequately reflected in the group’s market value.
Housebuilders deserve to be valued more cheaply than they have been over the past decade. The shares are not cheap relative to their history. At just over 15 times forecast earnings for next year, they trade at a premium to the long-running average.
Historically, that’s been justified by Persimmon’s ability to generate superior margins and returns on equity, a consequence of its large bank of strategic land, acquired without planning permission and therefore at a cheaper rate. However, a clogged-up planning system might make it harder for Persimmon to generate the level of return it has done in the past. The group may have to tie-up more capital in land and work in progress, particularly as it strives to rebuild the number of its sales outlets, as Peel Hunt has pointed out in the past.
A fall in the rate of land-buying in the two years before the pandemic, together with the high demand that ensued thanks to Rishi Sunak’s stamp duty break when he was chancellor, meant Persimmon entered last year with a lower level of outlets than historically had been the case. Another 30 outlets are set to be opened in the spring of next year.
There are better value ways to play an eventual recovery in the housing market.
Advice: Hold
Why: Lingering risks are not priced into the shares
Hochschild Mining
Investors in Hochschild Mining have needed to be comfortable with a high degree of uncertainty. Eduardo Landin, the new boss, is trying to provide more visibility, at least on how the goldminer plans to allocate its capital.
The company has set out production and cost targets for the next three years, in which the former will rise by about a fifth to between 340,000 and 375,000 ounces by 2026. In that time the group, which is focused largely on mining in Peru, is also aiming to reduce the cost of production to a range of $1,100 to $1,200 per ounce, from $1,490 to $1,580 this year.
The receipt of an environmental permit for its key Inmaculada mine in Peru was pivotal. The group is targeting between 200,000 and 205,000 in ounces of gold from the asset next year, which would represent 57 per cent of total output being targeted.
The Mara Rosa mine in Brazil is also due to be bolstered in the first quarter of next year, which Hochschild reckons will produce 83,000 to 93,000 ounces next year. Mara Rosa is a lower-cost mine and will be instrumental in helping to reduce the group’s overall production costs.
As investors have flocked to the safe haven of gold, the shares have risen enough to push the group back into the FTSE 250 in the latest reshuffle of the index. Yet past travails, together with the inherent volatility in the gold price and therefore cashflows, have been reflected in a paltry enterprise value of just over three times forecast earnings before interest, taxes and other charges.
This year has been disappointing. Production guidance was cut in September as granting of the Inmaculada permit was delayed. This year should be the low point for both earnings and cashflows, however, analysts at Peel Hunt think. The investment bank has forecast a pre-tax loss of $27 million this year, rising to $85 million next year.
Cash will be spent on its existing assets rather than greenfield exploration. Capital expenditure has been budgeted at between $171 million and $178 million this year, but Landin has said that the spending will be funded by cash generated by the business. Cash generation will be positive if gold stays at $1,850 an ounce or above — it is at $2,042 at the moment.
Advice: Buy
Why: Higher production will be a catalyst
