Broker snap: Spike in price may be over for Persimmon

15th Nov 2010 11:57

KBC Peel Hunt, a persistent bear on housebuilders, notes that Persimmon's trading update has a "positive tone but weaker undertow", reflecting over-valued shares in a struggling housebuilding sector.The group saw unit sales since July total around 9,400, under the broker's figure of 9,700. KBC forecasts a full year earnings before interest and tax margin of 7.6% but the "statement points to 8%, most likely from a 'very strong forward sold position carried over from the first half"."Persimmon's guidance for year end debt stands at £80m, higher than the broker's estimate of £64m. Nevertheless, analyst Robin Hardy reckons that "higher debt is preferable here as it means more money is being spent on land and that makes the potential improvement in margins more visible"."However, we still do not believe that Persimmon is spending enough on growth capital and that the focus on debt reduction is the wrong path" says Hardy. Hardy notes that sector peers Bovis, Bellway, Galliford Try and Barratt have been high net investors in land, making recovery in their margins much more visible."We really need to hear from Persimmon that investment in growth is going to pick up," Hardy believes.Persimmon has rallied 14% from the recent low of 333p to a high of 375p, but the broker warns that the 'spike' may now be over, as the shares are "still too expensive".The broker has a target price of 299p and retains its 'sell' recommendation.