The chequered history of housebuilders regarding the standards of their work and the spectre of cladding reparation costs make Persimmon’s repeated emphasis that it focuses on quality unsurprising. It’s also one of the reasons that completion volumes for last year have disappointed some analysts.
Rising Omicron cases and staff shortages have meant fewer builders on site of late, as well as people deciding to delay moving home. While completions rose by 7 per cent on the previous year, that was behind a rate of about 10 per cent expected in November.
And the problems do not end there. Pandemic-related disruption has clogged up the planning system, which has delayed the opening of new sites. During the second half of last year, the builder was operating from 285 outlets, compared with 305 in 2020.
Yet there was better news yesterday on the underlying operating margin, which should beat City expectations at 28 per cent. How so? Average private sales prices have been stronger than expected and imply an operating profit roughly in line with consensus forecasts of £975 million, which analysts expect to rise to £1.05 billion this year, back towards 2019 levels.
Some of the delayed outlets will be opened in the spring, traditionally a stronger time of the year to sell houses, and a total of 75 new sites are slated over the first six months of this year. It is the group’s ability to achieve those site openings on time that is one of the biggest risks to it failing to hit profit forecasts.
Demand going into this financial year remains high, with an order book at the end of December worth £1.62 billion, about a fifth ahead of the pre-pandemic level. That’s despite the stamp duty break having ceased. House price inflation might have started to ease from the peak achieved last summer, but it was 10.4 per cent on an annual basis during December, according to Nationwide.
The risk is that the planning system does not unclog and house price inflation is not as strong as the months roll by, while the industry faces build cost inflation, which could weaken margins.
Another uncertainty for investors is the impact, if any, that further remediation for cladding will have on shareholder returns. The dividend for the last financial year is expected to total 235p a share, which analysts at Peel Hunt expect to be repeated this year. That equates to a characteristically liberal dividend yield of 9.1 per cent at the present share price, the best in the sector.
The company is confident that the £75 million it has set aside for freehold and leasehold properties above 11 metres tall will be enough. The risk for Persimmon and its peers is that a blanket charge is levied on housebuilders, via some sort of windfall tax.
Cash of £1.25 billion on the balance sheet means that shareholder returns look safe enough for now, but that doesn’t mean that the shape of returns won’t change, according to Sam Cullen, an analyst at Peel Hunt, given that near-term earnings look set to be “pretty anaemic” in the industry. A share buyback programme could boost earnings per share, he said.
Investors have acknowledged that the tax break-induced boom is over. The shares are trading at just under 11 times forward earnings next year, down from a post-stamp duty peak multiple of just over 15.
Persimmon deserves a premium to rivals for a few reasons. Chief among them is a sector-leading return on equity. It also has a large strategic land bank, sites that have not been taken through the planning process and upon which it therefore can earn a higher margin. For existing investors, the income rewards remain in the near term at least, but regulatory uncertainty could anchor the share price in its place.
Advice Hold
Why Regulatory uncertainty and planning delays could weigh on investor sentiment and earnings this year
Safestore
As dry as the industry seems, self-storage has been one of the standout corners of the real estate market over the past 12 months. Safestore, the London-listed player, exemplifies that hype, delivering a share price rise of almost two thirds over the past year that has left the group valued at twice the net asset value forecast by analysts for the end of October this year.
What’s the reason? A rise in occupancy that left the closing rate at 84.5 per cent, up five percentage points on the same point in 2020 — and behind that, according to Frederic Vecchioli, the chief executive, is a growing awareness of the self-storage concept. The Safestore boss points to enquiries almost doubling in Britain over the past five years even as marketing spending has declined as a proportion of overall revenue. Rising occupancy rates feed through to increased rental rates, which rose by an average 2.3 per cent last year.
The number of domestic customers, who are charged a higher rate per square foot than business occupiers, has grown at a faster rate and they now account for 58 per cent of space occupied. A buoyant housing market and home renovations have been good for demand.
The benefits of relatively fixed operating costs mean that rising occupancy has lifted margins, which stood at 74.6 per cent at the end of October last year, up from 64.2 per cent in 2013. Revenue over the first two months of the new financial year rose by 17 per cent, a higher rate than the whole of last year. But comparisons will get tougher over the course of 2022 and the growth in NAV forecast by analysts for this year is roughly half the annual rate achieved in 2021.
One catalyst for growth might be an improvement in rates in Paris, where lower demand meant the average rate declined over the whole of last year but had risen to 0.5 per cent in the fourth quarter. But a return to more normal rates of NAV growth could see the shares struggle to re-rate much further in light of the eye-watering premium.
Advice Hold
Why High valuation makes the shares look fully valued
