After the referendum result last summer, shares in all the quoted housebuilders fell precipitously, in some cases to ridiculous levels in terms of earnings multiples and dividend yields, on the assumption that the ensuing uncertainty would put people off buying homes. This column argued then that this was a wild overreaction and so it proved. The various metrics including completions and average prices resumed their relentless march upwards with barely a hitch.
After the general election result the sector was on the slide again, on a similar assumption. Again, the political uncertainty does not seem to have put off housebuyers, given continuing low interest rates and support from Help to Buy. This last point is of particular help to Persimmon, the country’s second biggest housebuilder, which has little exposure to the possibly overheated southeast, none to London and is at the lower end of the price range.
Persimmon shares gained 54p to £23.45 on a first half closing update that showed that demand continued unabated through May and June to beyond the election, and the weekly sales rate per private site in the first half actually grew by 7 per cent against the same period last year. They are still 66p below their level on election day.
The volume of forward sales agreed at the June half-year end was £1.6 billion, 18 per cent up on a year before, while Persimmon will have the benefit of 100 new sites opening in the second half, against a total of 375 at present, a healthy enough rise. It is hard to conceive how any of the above could reverse.
Any rise in interest rates next year, of a token 0.25 per cent at first, will have little effect on first-time buyer demand. If some economic catastrophe dents consumer confidence sufficiently to reduce that demand, the housebuilders’ fortunes will be the least of our worries.
Persimmon is paying out large sums of surplus cash to investors, £2.85 billion or £9.25 a share between 2012 and 2021. This is achieved by means of a flat 110p for each year just paid and a special decided at the year end. Given there is £780 million of cash even after a dividend payment, this year’s special of 25p will probably be exceeded. On this year’s payments the yield is just below 6 per cent, reason enough to buy.
MY ADVICE Buy
WHY There is no obvious reason why the long housing boom should falter, while Persimmon offers an excellent dividend yield
FairFX
It has been a long time coming, given that the company floated in 2014, but FairFX has made its first halfway net profit, as yet unspecified but on revenues that were ahead by 25.8 per cent year on year to £433.8 million. The inevitable economies of scale as it builds its customer base, 630,000 at the last count, will mean that the profits will accelerate from here even if brokers are only looking for £600,000 or so for the current year, which hardly provides a meaningful multiple.
FairFX provides prepaid cards and has a payment platform that allows those customers to change currencies at rates better than they would get from high street banks or, heaven forfend, at the airport. The corporate segment was the stand-out, almost doubling revenues and accounting for about 15 per cent of all revenues and 30 per cent in cards. This has little to do with foreign exchange but allows companies to control the spending of their staff within the UK.
The shares, floated at 45p, have risen from 34p at the start of the year to 61¼p, up 1¾p last night. FairFX has been seen as a bid candidate and that seems the best reason to hold the shares.
MY ADVICE Hold
WHY Prospects of an eventual bid approach
Biffa
Biffa had made it clear, at the time of its flotation last autumn and then with the first set of results as a quoted company in June, that one purpose of coming to the market was to make acquisitions.
Its business of waste collection and management is highly fragmented and ripe for consolidation, by making existing vehicle fleets more efficient and cutting back head-office costs.
The company has just carried out its first big deal since the stock market float, the purchase for a maximum of £36.1 million of O’Brien Waste Recycling Solutions, which operates in the northeast.
This does pretty much what Biffa does elsewhere, but because it does not collect from households for local councils but only from businesses enjoys margins perhaps double the 7.5 per cent that Biffa, which gets about a fifth of its work from municipalities, enjoys.
The deal will therefore be earnings-enhancing from the off even before the obvious couple of million of annual cost savings. Biffa did five small deals in the year to the end of March but is targeting larger ones from now on. It has already turned down a number on the grounds of price. The O’Brien purchase is done at a bit more than five times earnings, which looks reasonable enough.
Biffa generates about £40 million of cash each year, so the £240 million of debt at the financial year end does not look too onerous. The shares, up 9½p at 229p, are well above the float price again and sell on 12 times this year’s earnings, which looks reasonable enough.
MY ADVICE Buy
WHY Growth prospects and reasonable profit multiple
And finally . . .
President Energy has been a disappointment to investors over the years, reduced to the status of a penny share by the fall in the oil price, but some believe that the market has yet to appreciate how valuable its assets in South America are. The oil explorer said in a brief update that June was a record month for sales from its concession in Argentina. Its assets in Louisiana, which were expanded in April, are still producing free cash. The next move should come in Paraguay, identifying potential partners there.
