Persimmon has established a long reign as a dividend king not only among the UK’s publicly-listed housebuilders but in the broader market. Not even a global pandemic could unseat it.
London’s largest publicly-listed housebuilder will pay a final 2020 dividend sooner than expected, returning 110p a share to investors in August rather than splitting it over two payments this year. Confidence has been imbued by the rebuilding of an impressive cash pile of £1.32 billion at the end of June, not just more than half on the same point last year but also in 2019.
Pent-up demand and — more crucially — the stamp duty break applied to the first £500,000 of a property’s value fuelled demand and lifted prices. For Persimmon, it led to a speedy recovery in completions to near 2019 levels and a heightened rate of growth in the average selling price of 5 per cent during the first six months of the year.
That house price inflation will fall back this year is difficult to argue against. The correlation between the lift-off in the sales price growth rate and the introduction of the tax incentive is clear enough. The tax holiday became less generous at the start of this month. Ahead of that, the Halifax house price index recorded a month-on-month decline in the rate of growth in June, an early indication of the trajectory that looks likely to become established.
A slower rise in new homes coming onto the sales market has intensified the situation. “The real issue has been supply, supply in the new build and second-hand markets,” Glynis Johnson, equity analyst at Jefferies, said. It is improvement on that front and tougher annual comparables, rather than the end of the stamp duty break, that should cause house price growth to moderate, she argues.
An easing in sales price rises is not the only threat to margins. Rises in material costs have fed through to elevated building costs for the industry. But materials costs account for only half of a housebuilder’s overall cost base. That gives housebuilders breathing room in the likely event of a slowdown. Persimmon said higher sales prices would offset cost pressures.
The tax break has been tapered, with no stamp duty paid on the first £250,000 of a property until the end of September. Persimmon’s lower average selling price, of £258,000 in the first half, means it could stand to benefit for longer than peers.
Management have pointed to a close-to-record order book of £1.82 billion at the end of June, but only 45 per cent of that is for completion past the end of September. For rival Redrow, that figure is much higher at 70 per cent.
But short-term boosts aside, there are many reasons why Persimmon deserves a premium to rivals. 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 can therefore earn a higher margin. Only London-focused Berkeley comes close to the group on that score.
The dividend this year is forecast by analysts to come in at 236p a share, which at last night’s £29.23 share price would equate to a dividend yield of just over 8 per cent. That is alluring in a low-rate world.
Judged against their own history, the shares are priced for the good times to continue, at just over 12 times anticipated earnings for the current financial year. That might be below an all-time high hit in June, but it is still above a seven-year average multiple of 10. On a comparative basis, the differences between the two ratios for competitors Redrow and Barratt Developments are narrower, where investors could find better value.
Advice Hold
Why The valuation of the shares adequately prices in recovery in completions and dividends
Entain
Australian betting company Tabcorp might have poked a hole in Entain’s armour after rebuffing its advances earlier this month. The complications and extra cash that come with bidding for a group in the midst of its own major acquisition deal, may have made Entain less attractive to US joint venture partner MGM, which is legally able to return with a revised offer from July 19.
But the argument for Entain paving its own way is steel-plated enough. The gambling group, formerly named GVC, notched-up its twenty-second quarter of double-digit growth in all-important online net gaming revenue during the three months to the end of June.
The shares were pushed to an all-time high on news that ebitda this year would be ahead of market consensus at £850 million to £900 million.
The group, which owns Ladbrokes and PartyPoker, is spinning many plates. By snapping up smaller rivals in emerging online gambling markets such as Brazil and the Baltics Entain, which has its own proprietary technology platform, can strip out running costs and boost returns.
Gaining ground in the recently-legalised sports betting market in the US is the bigger prize, but one that will take hefty investment to win. Entertain and MGM expect to plough $450 million in cash into US joint venture BetMGM this year, but it does not expect it to turn profitable until 2023.
Will it be able to sustainably afford expansion on multiple fronts? Cash generation is strong, and a steady reduction in net debt and a forecast resumption of dividend payments this year arfe positive pointers.
BetMGM is now the number two operator for sports betting and iGaming across the US with a 21 per cent market share, a position that does not seem to be adequately appreciated by investors.
After stripping out the contributions from its other businesses, James Wheatcroft of Jefferies bank estimates that the enterprise value of Entain’s 50 per cent share of BetMGM sits at just four times 2022 forecast sales, some way below the multiple of 14 attached to US market leader DraftKings.
Advice Buy
Why US growth could drive further re-rating in the shares
