Broker snap: Persimmon has ground to make up

5th Jul 2011 13:40

The share price reaction to Persimmon's trading update was negative but Northland Capital Partners is keeping the faith, saying the numbers show that the house builder's recovery show remains on the road."Forward sales are moving ahead of last year and with 70 new higher margin sites opened in H1 [first half] and another 70 scheduled for H2 [second half], the operating margin in the order book and further ahead is set to recover further. We have an operating margin forecast for the full year of 8.9% on flat unit sales and with the H1 margin at 9%, without the higher proportion of new sites in H2, we are comfortable with our estimates," Northland said.Northland's calculation of Persimmon's net asset value on the basis of its tangible asset assessment for 2011 is 570p per share, which offers considerable upside potential from the current share price of around 488p. "There are clear impediments to full recovery in the housing market but the group is showing how much can still be achieved through the process of self-help and controlled site expansion to derive higher margin sales in a flat market," Northland said.The broker thinks self-help measures will continue to boost margins well into 2012, as more higher margin sites replace older under-performing outlets. "The consensus forecast predicts around £129m pre-tax for the current year up from 2010's £91m; we are on £126m," Northland reports. "This position may deteriorate with a slowing pace of recovery if interest rates (not seen as a great hurdle) and unemployment move ahead faster than expected but there is a real opportunity now for Persimmon to demonstrate its land potential through margin growth and the success of its consistent and well tested self-help strategy," the broker concludes. Peel Hunt, a long-time bear on the sector, said the figures were a little softer than expected."We had expected sales and prices to move ahead but both are down, but margins are 40-50 bps [basis points] better than forecast at 9%," Peel Hunt analyst Robin Hardy said.The lower than expected first half sales leave a lot to deliver in the second half, Hardy believes. "We remain concerned about the group's high regional exposure, the high use of shared equity and in common with its peers we see inadequate returns," Hardy declared.Peel Hunt rates the shares as a "sell" and has a price target of 299p. --jh