Broker snap: Cash call question divides Persimmon watchers

25th Aug 2009 11:26

Results from housebuilder Persimmon were ahead of Panmure Gordon's expectations on most measures, prompting the broker to lift its price target.Panmure Gordon reiterates its 'hold' recommendation but ups its price target to 500p from 428p on the basis that write-downs are likely to be lower than its previous expectations.'We believe that house prices will edge off further in the next 12 months and that the group will have to make further write-downs, but clearly not to the degree we had previously factored in,' the broker conceded.Panmure Gordon has slashed its prediction of £325m of write-downs for Persimmon over the remainder of the cycle to £125m, thus giving an implied net asset value per share of 500p.'It is interesting that Persimmon has stated that it will only selectively purchase new land sites, as it has sufficient land holdings in place to develop in the coming years. Whilst this could be partly due to the fact that the group does not have abundant free cash resources (compared to some of its peer group), it should allay market fears that a dilutive rights issue is around the corner,' Panmure Gordon asserts.It is not a view that is shared by KBC Peel Hunt. 'Debt has reduced, but the working capital cycle has turned and the movement going forwards is likely to be outflows after 18 months of high inflows,' suggests KBC's Robin Hardy, a long time housebuilding sector bear.'The problem here, as highlighted by Bovis yesterday, is that covenants have been set based on required levels of cash inflow. This means that by re-investing in land and stock, Persimmon (along with most others in the sector) is constrained by its covenants. This raises the possibility of an expensive refinance or perhaps a raising of equity to support any re-investment,' Hardy warns.KBC rates the shares a 'sell' and has a target price of 301p.