Company news flow finally seems to be picking up with a couple of names I have covered in the past reporting updates today. The first of these is the house builder Persimmon (PSN) which unsurprisingly, given the strength in the housing market and the resultant price inflation, reported a strong trading update.
The average selling price for the Group in 2014 was c. £190,500, an increase of 5% over 2013 (£180,941). Full year revenues increased 23% over the prior year to £2.6bn (2013: £2.1bn). This revenue figure looks to be about 1.5% ahead of consensus forecasts (Source:Reuters / Stockopedia). They also remain confident of a further improvement in operating margins for the second half of the year which will underpin significant growth in pre-tax profits and excellent cash generation for the year ended 31 December 2014.
This suggests to me that they could slightly exceed current earnings estimates and perhaps report around 120 pence of earnings which together with the forecast dividend of 78.3 pence would leave them on 12.8x and a yield of 5% based on a price of 1537 pence this morning. They also have cash on the balance sheet of £378 million (around 8% of the market cap.) a strong forward order book and they have been able to add to their land bank.
So all in all seems reasonable, but I suspect the housing market may soften a little in the first half of 2015 given the strength last year and perhaps some uncertainty with the election coming up. But with the on going help from the government and the need for more houses to be built they still seem well placed to grow in the medium term with a likely tail wind of further modest house price inflation to help so I'm happy to hold on to this one for now, although I did top slice some Bellway at the end of last year.
Meanwhile today we have had the first of the food retailers, Sainsbury's (SBRY) with an update on their Q3 and Christmas trading. Here as we all know we are seeing the effects of price deflation which is leading to them seeing falling sales with:
So I will be steering clear of this one having sold it last year when Justin King stepped down as i think the price deflation and margin squeeze they are facing continues to be a toxic mix. Added to which they look like they will be cutting their dividend for the next two years which is never good in my book, but more on that another day.
Summary & Conclusion
I titled this piece inflation versus deflation and here you have an example of the effects of these forces on two businesses and this is why I currently favour Persimmon over Sainsbury's plus the opposing trends in their likely dividend payments, although Persimmon's is somewhat complicated by their capital return programme. But it does emphasis the importance of looking at trends in turnover and margins among other things when researching a company as per my check list. Plus see the chart below for what it has meant for the shares.
Today we have another set of results from a house builder, Persimmon (PSN), which as you would expect are very strong. No surprises here on the dividend as they made their second payment of £214m (70p per share), paid 4 July 2014, of surplus capital under the Capital Return Plan. This is a Berkeley Group (BKG) style plan to return surplus capital that they generate to shareholders over the next ten years. By way of reminder they describe this plan as follows:
"Our long term strategy is to deliver superior shareholder value through the housing cycle. This value will be delivered by growing the Group to optimal scale as markets develop and requires disciplined, well-judged capital deployment through the cycle. Management has given a long term commitment to shareholders that they will receive capital that is considered as surplus to the needs of the reinvestment requirements of the business through the cycle. This commitment is to return £6.20 per share, or £1.9 billion of capital, to shareholders over a ten year period to June 2021."
The first two payments of surplus capital totalling £1.45 per share, or £442 million, were made on 28 June 2013 and on 4 July this year. The third scheduled payment is 95 pence per share, or c. £290 million, in July 2015. This will be finalised and announced with the 2014 Full Year results of the Group scheduled for Tuesday 24 February 2015.
I'll not dwell on the results as they show lots of strong numbers which you can read in full at the link above if that is of interest to you. However I would highlight that the revenues were up by 33% to £1.2bn which compares to full year revenue growth forecasts of 18.4% (Source: Stockopedia). They also reported earnings per share of around 54 pence versus 34 pence at the same stage last year which in the event were around 42% of the full year earnings. If roughly the same h1 / h2 split is achieved this year then they could perhaps achieve closer to 128 pence of earnings against current forecasts of 111.8 pence which suggests some scope for upgrades on the back of these numbers. This is especially so as they say that current forward sales are up by 22% and that reservation in the traditionally quieter summer months since 1 July are running 9% ahead of last year.
Summary & Conclusion
Another strong set of numbers from Persimmon with further progress on their plans to return surplus capital to shareholders over the next few years. With next years payment of 95 pence this gives a yield of 7.1% at last nights closing price of 1335 pence. Meanwhile current trading looks strong and this leaves them well place to probably beat current forecasts which put it on 12x for this year, but this may turn out to be closer to 10x if they do see some upgrades and they are on just under 10x next years current forecast earnings. This one, like Bovis yesterday, also looks to have gone through a period of consolidation which it may also be breaking out from, but resistance from peaks earlier in the year is not far away at between 1400 and 1500 pence, so a strong hold for me for now. If you are not in it and are prepared to buy into the house builders then this seems like a good way to play it, but given the lumpy nature and timing of the dividend there may be better opportunities to get in along the way before the next payment is due.
Finally today I have for you an in line 6 month trading update from Imperial Tobacco (IMT) which they headlined as continued strategic progress and unchanged full year outlook. So steady as she goes with limited growth from their mature markets, but they claim their growth brands outperformed the market while specialist brands also did well. Their growth markets saw better growth of 8%. The main story going forward will be the integration of the US acquisition announced last month, the cost of which means they have suspended their share buy back programme.
This leaves them on around 12x with a 5% yield based off of the 10% dividend growth for this year which they have reiterated in these numbers. So OK in a dull way although the balance sheet is more geared than I would like, but I can just about live with it given the strong and predictable cash flows they generate - still beats cash in the bank if you are prepared to take the risk.
Apart from another dull set of figures from an insurer, this time Amlin (AML), the highlight of which was the 3.9% increase in the dividend. See the link above for full details and the insurance category to the right for more background on it. The only other thing that aroused my interest today was another set of strong numbers from a house builder. This time it was Bovis Homes Group (BVS) who reported profits and earnings up over 100% and a 200% increase in the dividend. Now of course it was the increase in the dividend which piqued my interest.
This is another well managed national house builder and they set out in the results they way they look to manage their activities over the cycle and they summarised market conditions in the first half as follows:
"The UK economy is recovering positively. In the first half of 2014 the UK housing market has continued to perform robustly with increased housing transaction activity. Home buyers have good access to mortgages and are confident about buying a home. This has been supported by the greater certainty provided by the extension of the Government's Help to Buy shared equity scheme."
On the back of this and their confidence in achieving their targets for this year and next they have announced an increased interim dividend of 12 pence and an intention to pay 35 pence for the full year in 2014 and at least 35 pence in 2015. This compares to forecasts of 22.3 pence and 28.4 pence (source:Stockopedia) prior to these numbers. Thereafter, in this phase of the cycle the Board plans to operate a regular payout ratio of one third of earnings with supplementary dividend payments to shareholders of cash surplus to requirements as they move towards optimal scale. This should still mean around 35 pence though as the eps forecast for 2015 was around 100 pence any way before any changes on the back of these figures.
Other points to note are net assets of 624 pence and a pension surplus of £1m. Their optimal scale is 5000 to 6000 units a year and by managing the housing cycle they seek to maximise returns, while effectively stewarding shareholders' capital, targeting ROCE of at least 20% by 2016. The Group held 17,702 consented plots in its land bank at 30 June 2014. The average consented land plot cost at the start of 2014 was £48,900. This has decreased to £45,900 at 30 June 2014 and compares to their average expected selling prices for 2014 of £210,000 to £215,000 forecast in these figures.
Summary and Conclusion:
Another set of strong numbers from a house builder, no surprise there, but the dividend increase was. Given the market was previously happy to put this one on a 3.5% yield based on the previous 2015 forecast dividend, you could argue for a 1000 pence price target if you applied the same yield to the new 35 pence dividend. This would also put it on around 10x the current expected earnings for that year.
Looking at the chart (see below or visit the website if you can't see it on the e-mail). it looks as though the shares have been in a trading range between 720 pence and 820 pence and they have this morning moved to the top end of that range on the back of these numbers in a stronger market which has also recovered from its recent lows. As they now look over bought you might therefore want to hold off and wait and see if it sags back into the range or finds support from its 200 day moving average at around 807 pence to confirm a bullish trend.
However, with the Bank of England back tracking on raising rates again last week and the consensus now shifting to no rate rise until next year you could argue for a continuation of the recent recovery in the price and a possible break out from the recent range. If this were to happen then technical analysts would argue for up to 100 pence of upside (the width of the range) which would also take it up towards its recent highs around 920 pence (resistance?) for a potential 13.5% return if you include 1.5% from the interim dividend.
On the downside if you are more worried about a housing market bubble rolling over or popping then I guess chartist could see the chart as what they call a head and shoulders which if the neck line at 720 pence were to break would theoretically target 100 pence more downside or 200 pence from current levels and take the shares back to around their book value at 620 pence where I would suggest it would look very cheap and be fundamentally suppo
So as I always say you pay your money and take your choice but for my money I would be looking for this one to break out on the upside for a move towards 900 to 1000 pence in the medium term.
As regular readers will know this UK housebuilder is one I have written on in the past several times, or see the Categories list at the side of the blog. They have had a an update today which as you would expect with all the talk about house prices rising is very positive. The key points are as follows:
Ted Ayres, Chief Executive, commented: "The Group has reacted positively to the continued strength of the UK housing market, significantly increasing output to satisfy customer demand. The favourable trading environment, together with the Group's national presence and strong balance sheet, ensures that Bellway is well positioned to continue its growth strategy and this, together with a strong focus on return on capital employed, should lead to further enhancements to shareholder value."
On the housing market they acknowledged the on going support provided by the help to buy scheme and that they were seeing the normal seasonal poattern of a slower summer after a strong spring selling season. They mentioned the Mortgage Market Review but suggested that this had had a limited impact apart from a few minor delays in processing some mortage applications.
Summary & Conclusion
Another positive update, as expected given market conditions, but it is encouraging to see on going momentum and a strong order book. I like this one for its national presence, conservative management and improving opertaing statistics which of course you would expect at this stage of the cycle. Given the on going governement support and the Bank of England being reluctant to raise rates too aggresively, it seems to me that the housing market should remain reasonably well supported. However, I guess some would disagree and continue to see house prices as extended and over due a correction. Obviously if that is your view then you would not want to touch a housbuilder, but I'm prepared to run with it as it is on less than 10x this years earnings with a yield of 3.3% which is 3x covered. More strong growth is expected for next year with the P/E expected to fall to 8x and the yield to rise to around 4%. This appears to be well underpinned by the forward order book, their land bank and the on going strength in the housing market which may be spreading out from London and the South East to a town near you soon - and maybe even somewhere like Doncaster. ‘The question is whether the scale of this disparity will decline over time or become further entrenched,’ said LSL on the gap between London and the rest of the UK. who produced the latest report on house prices mentioned in the first article above from which the graphic below is taken. If all this talk of house prices is depressingly familiar to you and as it is the silly season you could alway checkout my tongue in cheek post from earlier this year if you missed it called Let's Do The Sub Prime Warp Again!
Read the results of a survey on Investment Week that a majority of fund managers now think that there will be a rate rise before the election - which is now probably a consensus after recent comments by the Bank of England. However, on the same site, I note that Neil Woodford is apparently more sanguine because of the nature of the recent rise in employment (self employed and part time) and the subdued inflation outlook.
Meanwhile the always useful Nadeem Walayatt of the Market Oracle has put out a piece with his latest thoughts on the Bank of England's recent mutterings and a reiteration of his bullish views on UK Housing. You can read his whole piece and more on his site by clicking the image below.
I tend to agree with his conclusions and consequently as I mentioned last week I am still happy to run my house builders as part of a diversified income portfolio. However, of course these are just opinions and I'm sure others may disagree.
Talking of house builders we have had an update from one of my national players - Persimmon, ahead of their half year results to 30 June 2014. Unsurprisingly trading has been strong with turnover up by a third as selling prices rose 4% (mostly because of the mix) and they completed 28% more homes (6408). They opened 90 new sites in the first half of the year leaving their outlet network slightly lower at 380 active sites, having sold out a number of existing sites more swiftly due to stronger sales rates.
They plan to open approximately 100 new sites during the second half of the year. While their forward sales are up 28% with prices 3% higher and the number of houses sold forward (4000+) is up by 29%. So some on going strong momentum into the second half which should augur well for the full year numbers. They also pointed out that their land bank extends to around 82,000 plots and they have £326 million in cash after an expected £122 million cash in flow in the first half. They also confirmed that the 70 pence dividend (5.4% yield) had been approved and is due to be paid on 4 July. This leaves them on around 10x earnings with a 6 to 7% yield depending on how quickly their special dividend plans pan out, so as explained above I'm happy to run with this one for now although the market seems to have had a muted reaction to the statement today, but then they did have a good bounce last week after the B of E's likely ineffective measures aimed at slowing the current housing boom.
Finally, today we have had reports on the latest Nationwide House Price Index which highlights the on going boom, or bubble if you prefer, in the London market with prices up there by 25% (the highest since 1987) and the fastest rate of growth in national prices for nine years. Not sure this a reason for celebration (unless you happen to own a house in London perhaps) as wasn't this how we got in this mess in the first place? While building, buying and selling houses at ever increasing prices to each other helps to juice up the economy and the governments re-election prospects, I'm not sure it does much for the productivity and future prospect of the Country - hey ho there you go or as they say in France Plus ça change, plus c'est la même chose - au revoir.