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Robert Stephens discusses why housebuilder Persimmon has significant long-term investment potential.
Last week’s half-year results from Persimmon (LON:PSN) provide evidence that the housebuilder is in a strong position to overcome the uncertain outlook facing the UK housebuilding sector. Notably, it has a net cash position of £832 million. This contrasts with its position during the financial crisis, when it had net debt of £718 million.
This meant that it was less able to capitalise on an attractive land market during the financial crisis when compared to some of its sector peers. Today, though, it is in a position to add to its land bank should opportunities arise over the next few years. Doing so could lead to improving long-term returns for the business.
Alongside a continued demand/supply imbalance for new homes, a refreshed strategy and the company’s income potential, its financial position could enable it to produce high returns in the long run.
Persimmon’s results highlighted that the company is successfully moving in a new direction. It is now making customer satisfaction a top priority, as it seeks to improve on its three-star Home Builders Federation rating.
The cost of doing so in the short run is falling profitability, with the company’s profit before tax declining by 1.4% to £509.3 million in the first half of the year. However, a 40% increase in customer service spend and the company’s decision to hold back some sites for later release may help it to avoid the customer redress issues that previously caused severe financial challenges for sector peer Bovis.
An uncertain economic outlook for the UK does not appear to be negatively impacting demand for new homes. Persimmon’s half-year results showed that demand for its new homes has been robust. This situation could remain in place over the long run, with interest rates expected to remain below 1.5% over the next three years. This could help to mitigate concerns among some investors regarding current levels of housing affordability, while an undersupply of new homes versus demand could lead to further rises in house prices.
Although there is the potential for changes to the Help to Buy scheme and SDLT relief under a Boris Johnson-led government, the political consensus is focused on ensuring new homes are available and accessible to first-time buyers. Therefore, although political risk may currently be at an elevated level and could act as a drag on the sector’s performance in the short run, housebuilders may continue to enjoy a tailwind created by favourable government policy alongside a lack of supply and low interest rates.
Since Persimmon has a P/E ratio of 7, it offers a margin of safety that could compensate investors for the possible risks faced under a new government during the Brexit process.
Its large net cash position means that its returns to shareholders are relatively generous. For example, in the next 12 months it is expected to return 235p per share to its investors. This is due to be followed by a return of 110p per share in the following year. As a result, investors could potentially receive a two-year dividend amounting to 345p per share. This equates to around 18% of its current share price.
Therefore, although the wider sector may face a period of political and economic uncertainty, the outlook for Persimmon appears to be sound over the long run. Its balance sheet, refreshed strategy and valuation suggest that its risk/reward ratio is appealing.
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