Among the “throw ’em up and sell ’em fast” exponents of Britain’s big housebuilders, Persimmon has become the master over the past decade. However, delays in the planning system have thwarted the FTSE 100 housebuilder’s volume ambitions this year and puts the group at greater risk of missing profit guidance.
This snarled-up system has slowed the rate at which sales outlets have opened. During the first half of this year there were a total of 65 new sites, when the target was 75. The result was a 10 per cent decline in completions and a warning that the number of homes built for the whole year would amount to 14,500 to 15,000, lower than the just over 15,100 to almost 15,600 that was implied in March.
Those planning delays are not getting any better either, which also makes it less likely that a target of 70 outlet openings during the second half of this year will be met.
• Persimmon blames planning delay for lack of new homes
The upshot? Investors should lower their expectations. Analysts at Peel Hunt, the brokerage, reckon that operating profit forecasts will be cut by between 2 and 5 per cent, from the £1.06 billion they had pencilled in for this year, curtailing the growth expected.
For housebuilders, improving margins are predicated on increasing the volume of completions because some overheads are the same regardless of whether fewer homes are built and sold. This is likely to cause Persimmon’s operating margin to fall this year.
At least demand remains hot. The housebuilder had 75 per cent forward-sold the number of completions expected for the full year, ahead of where Persimmon would typically be at this point. That also means that the group has benefited from higher sales prices, which has provided some cushioning for profit margins. Over the first half of the year the average selling price increased 4 per cent, which offset the impact of build cost inflation that is running at between 8 and 10 per cent.
There is no sign of any heat coming out of the housing market, with annual sales prices rising 13 per cent last month, according to the latest house price index from the mortgage lender Halifax. For Persimmon, the average selling price of homes in its forward order book was 12 per cent ahead of last year. But economists do not expect this pace of growth to continue, as rising interest rates and higher living costs make houses less affordable. A slowdown in the rate of house price rises later this year could mean that the lower number of homes being sold is more keenly felt on Persimmon’s profit margin.
Persimmon’s volume woes aren’t all the fault of bureaucracy: it also has itself to blame. A fall in the rate of land buying in the two years leading up to the pandemic, together with the exorbitant demand since, means Persimmon entered this year already with a lower level of outlets than that from which it has historically operated. Dean Finch, the chief executive, more than doubled investment in land during the first half of the year, at just over £400 million. That is also a bullish call on the future direction of the market. A slowdown in demand could mean land values decline, and in hindsight the price at which the housebuilder bought plots suddenly looks a lot less attractive.
Despite that land-buying spree, cash levels remained high at a net £780 million at the end of last month, which with the high level of cash typically thrown off by the business, means a beefy dividend looks assured for investors willing to stomach a probable beating to the share price in future. The shares look cheap, but with good reason.
ADVICE Avoid
WHY Delays in the planning system and any weakness in sales price growth could result in the group missing profit expectations
Alliance Trust
Diversification comes with drawbacks, something investors in the FTSE 250 investment group Alliance Trust have become familiar with. Spreading its bets among nine managers and roughly 180 stocks globally means that when certain mega-cap stocks such as Apple or Tesla have zoomed ahead, the Alliance has underperformed.
Last year, being underweight against the benchmark, the MSCI All-Country World Index, meant the trust generated a total shareholder return of 16.5 per cent, just worse than the 19.6 per cent delivered by the index.
But investors should not be too hard on Alliance and the manager Willis Towers Watson. Why? Because when the market turns, there is an element of protection from chucking eggs in different baskets. A negative total return of 5.8 per cent since the start of this year isn’t great, but it is also not as bad as the 6.3 per cent decline delivered by the benchmark.
A 55-year unbroken record of increasing the dividend is the punchiest riposte to criticism towards its multi-manager approach. Last year’s payment was increased by almost 33 per cent to 19.05p a share, which at the year-end equated to a dividend yield of roughly 2.3 per cent. That hardly shoots the lights out, but the chances of that dividend record continuing looks highly secure.
The trust had £3.3 billion in distributable reserves at the end of last year, dwarfing the cost of last year’s payment of £59.2 million.
Multi-manager funds can be expensive, with investors in effect incurring fees first for the investment manager and then for the individual stock pickers. But the scale of assets under management across the wider organisation means Willis Towers Watson can also bargain harder on management fees. The annual ongoing charge amounts to 0.6 per cent of the value of your investment, which is also lower than fellow multi-manager trust Witan, at 0.71 per cent. Over the longer term, Alliance’s total NAV returns have also been superior to that peer, based on the three and five-year returns generated by Witan.
ADVICE Buy
WHY Shares are a reliable option for steady returns over the longer term