View from City Road: Persimmon may still suffer

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The Independent Online
THE fact that Persimmon, one of the most financially secure of the housebuilders, felt it had to reassure shareholders that it would hold its final dividend underlines the City's nervousness about the sector.

That nervousness is justified. Taylor Woodrow is virtually certain to cut its payment when it announces figures next week, Amec and Wimpey may join in, while Costain and John Mowlem could be forced into a second dividend cut.

Persimmon's results had other lessons for the sector. Duncan Davidson, the chairman, is right when he says that the only way to return to the level of profits enjoyed in 1988 is to increase volumes, but his figures illustrate the perils of getting the timing wrong. Persimmon increased the number of sites from 130 to 170 in the first six months of the year, but it sold only 28 more houses. The pounds 12m cost of the new sites was one of the reasons for a fall in profits from pounds 12.5m to pounds 7.3m before tax.

Profits were also hit by continued pressure on selling prices and the higher cost of clinching a sale - incentives have pushed average selling costs up from pounds 1,500 at the peak of the market to pounds 5,000 - and overall margins fell from 18.2 to 10.1 per cent. Mr Davidson pointed out that the group should have used up its expensive land - a quarter of its stock was bought at 1988 prices - by the end of next year, which should mean margins will start improving again.

Persimmon is lucky. Its gearing is just 24 per cent, so it can afford to work quickly through more expensive land and buy at today's lower prices. Others - such as Costain and Trafalgar House - can not afford to provide properly against land costs nor to replenish their stocks at lower prices, which will leave their housing profits depressed for some time.

Persimmon is also almost a pure housebuilder, so any improvement flows straight through to the bottom line. Companies like Wimpey and Amec may have made sufficient provisions against their landbanks, but the divisions are too small to compensate for the problems of contracting and commercial property.

That makes Persimmon one of the better bets in a depressed sector. Disappointment at the interims pushed its shares down 25p to 148p, putting it on a prospective multiple of 12.8 and a yield of 7.7 per cent.

That does not look too expensive, but the sector is likely to fall further as the disaster of the interim results season unfolds. It is still too soon to buy.