Housebuilders are beginning to present investors with a real quandary. There is no sign of the housing boom coming to an end, mortgages are getting even cheaper, demand is there and consumer confidence is increasing. The structural gap between homes built and homes needed can only get worse.
Every trading update from the sector has reflected this. Though price inflation may have slackened off — the Nationwide said the rise during the past year was 3.3 per cent — the builders are still benefiting from a change of mix as they put up larger homes.
So Persimmon was able to fall in line with the rest of the sector and report increases in completions and average selling prices. Visitor numbers are flattening, but the company, one of the three biggest in the sector, is able to continue to grow by adding new sites; another 122 opened in the first half of this year despite some inevitable slowdown in the planning process before the election. And yet the valuations some builders are on look distinctly toppy.
A useful note from Liberum, the broker, shows that share prices for the sector, even if you take out Berkeley, an outlier because of the huge amounts of cash it is returning to investors, are now more than twice net asset values.
Persimmon shares, up 8p at £20.24, are up by 35 per cent since the start of this year and 22 per cent since the election. That price is something like 2.9 times net asset value for this year.
The company is carrying out its own capital return, while investing heavily in land while the price is still favourable. It has a land bank equivalent to more than six years’ current completions.
Persimmon is returning £1.7 billion to investors by 2019. The third payment, of 95p, was made in April. The return has already been accelerated once, brought back from 2021. Assuming this does not happen again, and that will depend on future land purchases, forecast dividends of 120p during the next couple of years would mean the shares yield a prospective 6 per cent, an attractive income.
I would not wish to call the top of the housebuilding cycle. Others have got that wrong before. I might, though, be inclined to take some profits on Persimmon shares.
Net cash at June 30 £278m
MY ADVICE Take profits
WHY It is probably too early to call the top of the housing cycle, but some of the valuations in the sector are looking stretched
When Calum MacLean joined Synthomer from Ineos as chief executive at the start of the year, he pledged to double the group in size over the next two to three years by means of acquisitions.
This is the old Yule Catto speciality chemicals business. Its product range is fairly limited, making material that goes into medical gloves and damp-proofing for homes. The last transformational deal was back in 2011.
Some have wondered whether there are sufficient targets out there to satisfy that need for expansion, and whether the prices attached to such have run away from what the company can reasonably afford. Instead, Synthomer has the option to return capital to shareholders — a special dividend is being paid today.
One analyst has speculated that as much as 20 per cent of the £1 billion-plus market capitalisation could be paid out over the next three years. Yesterday’s trading statement was a swings and roundabouts one, improvements in Asia balancing deterioration in Europe.
The shares, off 4¼p at 310p, have come up from about 180p in October. On 16 times earnings, profit-taking looks in order.
Consensus PBT for 2015 £90.2m
MY ADVICE Take profits
WHY Rating is high and uncertainties lie ahead
C &C, the Irish cider maker, is probably best known for its Magners brand and for its peculiar attempt to buy Spirit Pub Company last autumn.
This, as I wrote yesterday, went to Greene King instead, and it was never terribly clear why the chain should be more valuable to a drinks producer than to a larger pub operator. The talks were preliminary; the affair did illustrate the difficulty that C&C has in getting its brands to market in England and Wales in the on-trade.
C&C’s core markets suffered a wobble in the first quarter from the start of March. The weather in its core markets of the Irish Republic and Scotland was poor in May and June. The tougher drink-driving laws in Scotland are supposed to have had an effect, and there was disruption from the purchase of a wholesaler there.
England and Wales had a good quarter. The company still reckons it can make more from exporting to places such as eastern Europe and Australia than trying to break into that English market, because cider is apparently the fastest-growing drink globally, with annual sales up 5 per cent to 10 per cent.
None of the headwinds in Ireland and Scotland should have come as a surprise, and C&C shares lost half a cent to €3.405 in London. They have been poor performers over the past year, the market having been spooked, so to speak, by that Spirit diversion. The company was giving no financial guidance and little improvement is expected this financial year, though, as ever, the summer will be crucial. On 12 times earnings, no reason to chase.
Profits from Ireland/Scotland 85%
MY ADVICE Avoid for now
WHY Current year looks to be unremarkable
And finally . . .
The merger this week of Willis and Towers Watson, the latest insurance deal in the UK, was swiftly followed by the $24 billion purchase in the US of Chubb by Ace. The insurance team at Shore Capital has been pondering this rush of M&A activity. It concludes that the main drivers are softening insurance rates, low investment yields, tighter controls on capital and cost savings. They run through the sector. Amlin and Lancashire look vulnerable, Hiscox won’t go cheaply, and the one seen as likely to go next is Novae.
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