More Good News From Housebuilders

Two more major housebuilders reckon business is on the up.

Back to profit

Persimmon (LSE: PSN) was the first to report, on Tuesday, and the results continued Barratt's trend. Though full-year completions were lower than in 2008, as expected (8,966 completions at an average price of £160,500 against £10,202 at a price of £173,000 the year before), a writeback due to an uprating of Persimmon's land assets gave the company its first profit since 2007.

Writedowns due to falling asset values have been the norm of late, but Persimmon's £74.8m boost in assets helped it secure a pre-tax profit of £77.8m, against a loss of £780m in 2008. The turnaround was also helped by a stronger second half, with Persimmon's operating margin firming up to 6%, from 1.6% in the first half.

The company ended the year with a forward order book £900m, against £698m at the end of 2008. But not surprisingly, Persimmon is not paying a dividend for 2009.

A smaller loss

Taylor Wimpey (LSE: TW), reporting on Wednesday, didn't quite share the same fortunes, recording a pre-tax loss of £700m. But that's still good progress, coming after 2008's pre-tax loss off £1.97bn. And the loss was also largely due to a writedown of £527m on the falling value of some of the company's land and building projects in the UK, USA, and Spain.

Similarly to Persimmon, Taylor Wimpey saw its number of completions fall from 13,394 to 10,186, with the average selling price falling from £171,000 to £160,000. But the company also saw the housing market firming during the year, and actually enjoyed an operating profit in the second half of the year.

Net debt halved too, from £1.5bn at 31st December 2008 to £751m at the end of 2009. Again, there will be no dividend paid this year.

Balfour Beatty (LSE: BBY), whose operations include the provision of infrastructure and services to the construction, engineering, road and rail sectors, reported a 7% increase in pre-tax profit on Thursday, for the year ending December 2009. That comes from group revenue that grew by 8%, to over £8.9bn, though adjusted earnings per share came in flat. The full year dividend is raised by 8%, to 12p per share.

With much of its operations in the US, Balfour Beatty is hoping to be protected, at least to some extent, from any future contraction in the UK public sector as a result of forthcoming cuts in government spending.

The big picture

It does look like construction and engineering in general really are picking up from the depths of the recession, and profitability is likely to plod on upwards over the next few years.

And the housing construction business seems to have passed through the worst and is coming out of the other side. However, that recovery is still fragile. We are still in an economic environment of very low interest rates, and the increasing inflation that must surely eventually come as a result of the government's quantitative easing policy ("printing money" to most of us), could provide an economic shock as it would inevitably have to feed through to higher interest rates sooner or later.

Cuts in government spending will also have an impact on the social housing sector, which accounts for a significant proportion of the UK's housebuilders' revenues -- though ironically, lower government spending might also help to hold back inflation for a bit longer.

The shares?

Should we be buying Persimmon and Taylor Wimpey shares now? Well, both companies show high prospective P/E values, but those are pretty much meaningless until they get back to sustainable levels of profits. But they're both looking reasonable in terms of book values and net asset values, especially as falling asset values have bottomed now.

An adventurous investor buyings shares now could well be looking back in 2 or 3 years' time on a good decision.

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