Even amid the furore over build quality and the fat pay packet of its former boss, Jeff Fairburn, Persimmon could count on two things to keep investors onside. One, wide operating margins that trounced peers, and two, a bumper dividend. A slide in the housing market has removed the bait.
The FTSE 100 group has slashed its dividend, declaring a final payment of just 60p for last year, with the same amount targeted for this year. That is the lowest annual cash return in more than a decade, and equates to a dividend yield of 4.6 per cent. Persimmon faces several challenges to its margin if conditions don’t improve. A crisis of confidence among potential buyers and a near doubling in mortgage borrowing rates over the past 12 months has sunk sales rates to almost half the level they were running at during the first eight weeks of last year.
Without a pick-up, completion volumes will fall to 8,000-9,000 this year, a way below the almost 15,000 houses put up last year. That alone could wipe five percentage points from its underlying operating margin this year. Then there are higher sales incentives and marketing costs, the latter of which has risen to 3 per cent of the sales price, double the rate last summer. That in itself would sap three percentage points from the margin. Let’s not forget build cost inflation, which is running at about 8 per cent, as soaring energy prices have pushed up raw materials costs. If house prices remain flat? Another five percentage points to be wiped from the margin. Housebuilders only need sales prices to rise at about half the rate of cost inflation to keep the margin stable, easily done when the market was booming over the past two years. True, the average selling price of the 2,800 houses forward sold is 6 per cent higher than those sold last year. But that represents less than half the number of homes that it expects to complete this year, which leaves room for the average price inflation to be diluted. That doesn’t include the incentives either.
The upshot? In a worst-case scenario its operating margin could nearly halve from the 27 per cent recorded last year to 14 per cent. Analysts at the investment bank Peel Hunt think a cut of more than 20 per cent to the consensus profit forecast might be needed. Higher starting margins, a feature of its weighty strategic land bank, provide some cushion against the pressures of build cost inflation and weakening sales prices and volumes. But then investors have been asked to stump up more for that privilege. The shares still trade at a premium to rivals, at just over 12 times forward earnings. That is also no discount to the group’s own historic average.
This might all sound dramatic, even by the grim standards of the housing industry. After all, a decline in weekly sales rates to 0.52 in the first eight weeks of the year is no worse than the rest of the sector. If you’re wondering why, look at the historic state of Persimmon’s sales outlet numbers. A fall in the rate of land buying in the two years leading up to the pandemic, together with the exorbitant 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 that from which it has historically operated. That made it more vulnerable to delays caused by the snarled-up planning system, which forced it to warn last July that completion volumes for last year would be weaker than anticipated.
With one eye on past missteps, the housebuilder is not exiting the land market even if buying will slow on last year. In the meantime, refilling the land bank will probably sap the return on capital employed. There is plenty of room for Persimmon to push more investors away.
Advice Avoid
Why Stock’s valuation does not take into account the diminished dividend or risks to the margin
Trig
The end of easy money flooding financial markets has forced investors to take a more scrupulous look at the rush of green energy and infrastructure funds that have established themselves over the past decade. Scale and diversity are the two major hallmarks of quality; The Renewables Infrastructure Group (Trig) possesses both.
The fund, which has amassed, net of debt, wind, solar and battery storage assets across Europe worth almost £4 billion, counts as one of the 20 largest groups within the FTSE 250 at its current valuation — even after a slippage in the share price that has accompanied the rise in interest rates, a fall that has left the shares trading at a 7 per cent discount to the value of its assets.
Having a tie to inflation within the income stream provides some protection against the increase in interest rates. The upshot? The NAV pushed on 13 per cent to 135p a share.
More than half of its cashflows are derived from government subsidies, which rise in line with either retail or consumer price inflation.The rest is sold into the merchant power market, which has enjoyed a bigger surge in prices.
The skew might have detracted from income last year, but it also provides greater visibility of what the fund stands to bank as energy prices ease over the course of 2023. The windfall tax on renewable generators is also now accounted for in the NAV, which removes another strand of uncertainty.
Bar 2021, the fund has paid out a rising dividend every year since it listed on the London market a decade ago. This year it expects to continue that record, targeting a dividend of 7.18p a share, which leaves the shares offering a potential yield of 5.8 per cent at the current price. Dividends have been well covered too, with cashflows equating to 1.55 times the amount returned to shareholders, even after debt repayments.
The boom in energy prices means there is more excess cash to pay down project-led debt, which stands at around £2.3 billion and is mostly at a fixed rate until maturity.
Trig is one of a diminished number of infrastructure trusts that should still stand up to scrutiny.
Advice Buy
Why The shares offer a solid dividend and trade at a decent discount to NAV
