Investment Column: Persimmon may struggle to raise roof

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The Independent Online


Our view: Hold

Share price: 437.5p (-0.2p)

Around the turn of the new year, it seemed that virtually every single survey on the housing market warned of flat or falling prices in 2011. Among all this doom and gloom, it is easy to forget that a number of house builders have been performing robustly having slashed their debt mountains and bought up land while it was cheap.

Persimmon, the UK's second biggest, fits into this category and yesterday boasted that underlying pre-tax profits would be at the top end of City expectations of between £75m and £96m. The building blocks of this year's rise have been an increase in completed sales of 9,384, compared to 8,976 last year; a 6 per cent rise in average selling prices; and a further reduction in net debt to £51m, (it had been above £1bn as recently as 2008). Furthermore, while Persimmon admitted that recent activity in the housing market had been hit by the severe weather conditions, it said that pricing has "remained stable" and that the margins on forward sales of about £565m have been maintained.

The builder also believes that prospective buyers who postponed house hunting expeditions during the near-Arctic conditions will return over the coming weeks. However, we are not so bullish, not least as the negative sentiment about the housing market that has weighed on their shares recently is likely to continue this year. We are particularly concerned about the ongoing mortgage famine for prospective house purchasers while the anaemic growth in UK wages means the dream of owning a home remains out of reach for many. New Financial Services Authority rules won't help either. While many analysts believe that Persimmon's shares offer good value – they trade at just 0.86 times forecast 2010 net asset value – we advise caution on this well-run housebuilder until sentiment on the wider market picks up. Hold for now.

Axis Shield

Our view: Buy

Share price: 270p (+7p)

Axis Shield issued what by all accounts was a positive pre-close update yesterday. Ahead of its results, the medical diagnostics group, which manufactures testing kits, said it was expecting to post strong growth, with revenues likely to exceed £100m for the first time.

There was also some good news for income investors too, with Axis saying it is set to announce a maiden dividend in respect of the year to the end of December. Cheered by the news, the shares moved up, gaining more than 6 per cent at one point in the session.

The thing is that, even after trading up last night, the stock remains around 9 per cent off the recent peak in mid-October. This means that, at current levels, the shares trade on multiples of around 15 times forecast full-year earnings for this year.

But, when measured against the forecasts for 2012, that figure eases to less than 12 times, according to Peel Hunt. The numbers make little sense in light of the company's prospects in our view. The market for diagnostics is a growing one, not just here, but in emerging markets – an area where Axis is already active. Moreover, Axis boasts a strong balance sheet. The market is too bearish about this stock. Buy.

Michael Page

Our view: Take Profits

Share price: 527.5p (-12.5p)

We looked at Michael Page quite recently (October) when we said hold. At the time, we wondered if the shares' spectacular rise had come to an end (they closed at 463.4p) after a thoroughly impressive performance. Not a bit of it. Those who followed our advice to hold have enjoyed yet more rises and the shares, at yesterday's close, were more than 10 per cent higher.

And the headhunter's success is continuing with a trading statement suggesting profits are likely to beat the City's consensus forecasts again. We're taking another look because growth appears to have peaked, excepting the Europe, Middle East and Africa region, in the third quarter. What's more, at the current level the shares trade on a very high multiple of 22 times 2011 forecast earnings, although that falls to a more reasonable 14 times 2012. This is a premium to the sector. We rate Michael Page and its management highly.

However, on valuation grounds, and with the spectacular growth of the last year likely over for now, it might be the time to take profits, but look to buy again on any sign of weakness.