PERSIMMON, the UK’s second largest housebuilder, yesterday delivered its customary set of record results, with profits up by a staggering 45 per cent and turnover, average selling prices and margins all moving strongly ahead.
This record performance related to the first half of this year, when the housing market was continuing to steam ahead. Since then the market has experienced a slight dip following a succession of interest rate rises which have dampened consumer confidence. But Persimmon has a healthy forward order book and if the residential property market is more subdued going forward, it is well equipped to adapt to the changing conditions. Profit margins may suffer but the group has a wide geographic spread of properties, which offers protection. With an average selling price of £171,082 its product also remains comparatively affordable.
It is true that if house prices stop climbing or grow at more modest rates, the company will need to increase volume to keep profits moving forward. But that is exactly what Persimmon is setting out to do. This year the company is on track to build just under 13,000 homes, but it believes that even without a large acquisition it could increase output to 19,000 homes a year.
Meanwhile, in the past three years the company’s gearing has dropped from more than 100 per cent following its acquisition of Beazer to 21 per cent. That leaves Persimmon with sufficient flexibility in the balance sheet to pursue a takeover if the opportunity arises.
The company’s confidence in its future prospects is underlined by its decision to increase its interim dividend by 30 per cent at the half-year stage to 9.1p a share. In addition, Persimmon has pledged to pay out a total of not less than 23p for the full year, ensuring a minimum rise of 25 per cent. The move is a welcome departure for the company, which has previously increased its dividend by more modest levels despite huge increases in operating cash flow.
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The promised increase means the stock gives a prospective dividend yield of 3.5 per cent. That may be no more than the average for the FTSE all-share index, but the payment is four times covered by earnings per share and that makes it more than usually robust. Buy.
Bodycote International
BODYCOTE has rewarded shareholders who backed its March rights issue in double-quick time. It would be unfair to categorise the metal finishing company’s call for £60 million as a rescue rights issue, but the company was in a tight corner and the prospect of throwing money at the problems will not have filled all shareholders with delight. Yet six months on, the company has reported a 25 per cent increase in profits before tax. Since shares now trade at a 38 per cent premium to the 100p rights issue price, investors are also showing a good return on their decision to provide added capital.
In truth, the rights issue cash came too late in the half to make much difference to the reported numbers. The interest charge was a little lighter because debt was reduced towards the end of the period. The enhanced financial flexibility also allowed Bodycote to accelerate its withdrawal from loss-making electroplating activities, but here again the half-year profit numbers drew relatively little benefit from the moves. The rights issue cash will help with the working capital requirements of meeting new contracts won from the likes of power plant construction customers in North America. Again, these projects are yet to bear fruit. Similarly, the rights issue cash gives Bodycote the firepower to make acquisitions and it is much too early to see any value created from these.
The impressive profits growth recorded in the six months to June 30 came largely as a result of cost-cutting. Although that process is now largely complete — and although rising energy prices might undo some of the work done in this department — Bodycote shareholders should now begin to reap rewards as a more direct result of the rights issue. If demand for Bodycote services rises, as the company believes is likely, and with many of the operation costs fixed, good chunks of added sales revenue will fall to the bottom line. This operational gearing will act against Bodycote if demand weakens but, for now, the omens are good. Buy.
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Glenmorangie
IT DID NOT take long for investors to acquire a taste for shares in Glenmorangie, the whisky distiller. News, first published in these pages, that the Macdonald family wants to sell its controlling stake sent the limited voting “A” shares up 25 per cent yesterday. Brown-Forman, the Jack Daniel’s distiller, is on the share register and it is easy to assume that an auction will break out. If it does, there could be plenty more share price growth for new shareholders to latch on to.
Glenmorangie has a strong market position, an attractive brand and good growth prospects. Moreover, its stocks of whisky are held in the books at a value equivalent to their cost of production — or £84 million. But it is suggested that the company insures the stock for £400 million and this might better reflect the true value.
But buyers cannot be relied upon to pay much more for Glenmorangie than the current market price. At yesterday’s closing price of £13.30, the limited voting “A” shares changed hands at the equivalent of 25 times prospective earnings a share. That is twice the average for the drinks sector and four times the price at which shares in the whisky company traded five years ago. The enfranchised Glenmorangie “B” shares trade on an earnings multiple of 91 times.
At the same time, shareholders independent of the Macdonald family are in a minority and they could find themselves playing a distant second fiddle to the family. Take profits.