...our friends? This is a continuation of my recent posts related to the budget and the governments Help to Buy or Let's do the Sub Prime Warp again! In that post I said buy house builders and I wasn't joking. Now I know you are thinking - are you mad, but bear with me.
Now house builders have had a great run over the last few years - I know because I trebled my money in Gleeson (GLE) having bought it at less than book value back in the middle of 2011. I then switched this into Bellway (BWY) towards the end of last year as they were cheaper on price to book and offered a better and more regular dividend. See the chart below which also shows Persimmon (PSN) which I have bought now on the back of the extension to the Help to buy for new homes out to 2020. See further back ground to this after the chart if that is of interest.
So why buy Persimmon now - apart from the obvious support they are getting from the governments help to buy scheme?
Well firstly they remain reasonably cheap on basic P/E, but then house builders usually are and on price to book they are no longer such a bargain at around 2x. However, their operating metrics like margins, ROCE and ROE are all around mid teens currently thanks to the favourable operating background. However it was also the recent final results announcement and the amendments they made to their dividend plans for the next few years that got me interested.
The highlights from the results statement to the end of 2013 were as follows:
· Underlying profit before tax* increased by 49% to £330m (2012: £222m**)
· Full year revenue up 21% to £2.1bn (2012: £1.7bn)
· Legal completions increased by 16% to 11,528 (2012: 9,903) and average selling price*** increased 4% to £181,861 (2012: £175,640)
· Operating margin* increased to 16.0% (2012: 12.9%**); with second half improvement to 16.6%
· Return on average capital employed* increased by 44% to 17.6% (2012: 12.2%)
· A further 17,735 plots of land acquired in the year bringing consented landbank to 74,407 representing 6.5 years supply
· Continued focus on the development of strategic land with 33% of replacement land successfully converted from the Group's strategic land portfolio
· Underlying basic earnings per share* increased by 47% to 83.3p (2012: 56.7p**)
· Net cash of £204m at 31 December 2013 (2012: £201m cash)
· Forward sales^ strongly ahead at over £1.4bn (2013: £1.0bn), an increase of 41%
Nicholas Wrigley, Group Chairman, said: "Persimmon achieved a strong result for the year as we responded quickly to the increased customer demand that resulted from improved mortgage lending, the introduction of Help to Buy in April 2013 and the increase in consumer confidence as the UK returned to more meaningful economic growth. Our success in increasing build rates significantly in response, with second half volumes 30% ahead of those in the first six months, underpinned a robust overall performance.
"2013 was a year of excellent progress against our strategic plan and the strong growth of the business has underpinned an acceleration of the Capital Return Plan.
"The Group entered 2014 with a very strong forward order book and the early weeks of the spring selling season have been encouraging, with our weekly private sales rate per site being 22% ahead of last year for the first eight weeks. We anticipate a further year of encouraging sales growth in 2014."
On their Long Term Strategy, the Capital Return Plan and the outlook they had the following to say:
"The results for the year ended 31 December 2013 represent the delivery of the second year of our original nine-and-a-half year strategic plan launched in February 2012 and reflect significant progress against the original plan.
We remain determined to build Persimmon into a stronger, larger business over the long term, investing the appropriate level of capital in the asset platform to sustain the Group at its future larger scale. We remain committed to achieving this whilst maintaining the quality of our land replacement and minimising financial risk. This strategy is designed to deliver strong free cash generation through the housing cycle for the benefit of all our shareholders.
The strategic plan announced in February 2012 included a commitment to return £1.9 billion (£6.20 per share) of surplus capital to shareholders over nine-and-a-half years. On 28 June 2013 we paid £228m to shareholders representing the first instalment under the Capital Return Plan of 75p per share. As a result of the strong progress the Group has made, and against the backdrop of an improving housing market, the Board is recommending that the original Capital Return Plan schedule be accelerated.
At the AGM in April 2013, the Board indicated a payment of 10p per share would be accelerated into 2014 from the planned payment in 2015 (originally 95p per share). The Directors now plan to return 70p per share in 2014 and, rather than this payment being accelerated from the scheduled payment for 2015, it is to be a part acceleration of the 115p final planned payment due in 2021. In addition the original planned payment of 95p per share in 2015 is to be reinstated in full.
Following consultation with shareholders, the Board has also determined to make capital return payments of at least 10p per share in both 2016 and 2018, years in which a payment was not originally planned. These two new payments will be a further part acceleration of the 115p final planned payment due in 2021. The Board will determine the final value of these further instalments of the Capital Return Plan at the appropriate date, in light of the future progress of the business.
The capital return for 2014 of 70p per share will be made on Friday 4 July 2014. The Directors propose to offer shareholders the opportunity (wherever possible) to choose whether to receive the cash either as a return of capital or as dividend income by way of a B share/C share scheme in line with the process for the payment made in 2013. Full details of the B/C share proposal will be sent to shareholders, along with the AGM notice, on Monday 17 March 2014.
The Group entered 2014 with a very strong forward order book of £908m of sales reserved and contracted, creating a strong platform for further sales growth in the new year.
The early weeks of the spring selling season have been encouraging, with our weekly private sales rate per site being 22% ahead of last year for the first eight weeks. Visitor numbers to our sites across the UK are 16% stronger than the prior year and cancellation rates remain at historically low levels of c.15% (2013: c.16%). Total forward sales are currently £1,424m for 2014, including legal completions taken so far this year, an increase of 41% on the previous year (2013: £1,010m). Selling prices have remained firm. The Group anticipates a further year of encouraging sales growth in 2014."
Summary & Conclusion
With this background and outlook plus the support of the governments five year help to buy scheme I decided to pick some of these up as the 70 pence dividend this year alone gives a yield of over 5% and will be paid as either income or a capital return. I also like Persimmon because it is a national builder and therefore should be well placed to benefit from any spreading of the housing recovery outside London and the South East.