The UK’s housebuilding and construction business has been hit hard since the results of the EU referendum became known, with a lot of shares down more than 30% since 23 June.
Great first half
One of those is Persimmon (LSE: PSN), whose shares have fallen 35% to 1,370p, and that includes a 4% drop after Tuesday’s first-half trading update was released ahead of results expected on 23 August. The first half seems to have gone swimmingly well, with legal completions up 6% to 7,238 new homes and an average selling price up 6% to £205,000. Total revenues climbed by 12% to £1.49bn.
The company spoke of cheap borrowing, a healthy labour market and strong consumer confidence, and reported an 18% rise in mortgage approvals in the first quarter with April and May continuing the trend.
The big downer, of course, is that EU thing. As Persimmon said, it’s too soon to judge the effect the vote will have. But the company points to long-term unfulfilled demand and says it sees market fundamentals as remaining strong. It believes that its “focus on building traditional family housing in attractive locations … will continue to attract customers in good numbers.” Having spent £305m on new land purchases, Persimmon is being “selective” in its expenditure and any feared weakness in the market will surely lower land prices and provide opportunities for building up land banks for the future.
This is a company that’s conservatively managed, with a strong capital return policy (including £9 per share earmarked for return by 2021), which says it’s “confident in the group’s prospects based upon our long-term strategy.” I can’t see anything here other than an attractive contrarian recovery prospect.
Another one hammered
First-half results from brownfield site developer St. Modwen Properties (LSE: SMP) weren’t enough to protect its shares from another beating, and as I write they’re down 8% on the day to 238p, and down 29% since the referendum.
The results were confused (to this Fool’s mind at least) by the market valuation of the firm’s New Covent Garden Market development being included in profit, with a big rise in its value contributing to £206m in pre-tax profit last year. This year saw its valuation drop by £21m and there was a £13m hit from the increase in Stamp Duty Land Tax, lowering pre-tax profit to just £30m. Having said that, the company reported £34m in trading profit, which was close to last year’s record level of £35m.
None of this compensated for the EU effect, after chief executive Bill Oliver warned of a period of uncertainty following the referendum as we wait to see how the UK property market will respond. He told us that “until we have more clarity we believe it is appropriate to take a more cautious approach to the delivery of our development strategy“.
With St. Modwen shares now on a forward P/E of 11, I’m seeing a possible contrarian buy here too, although I don’t see it as clearly as Persimmon. Commercial property could be seriously hard hit should the UK lose a lot of business now we’re on our way out of the EU, but the housing shortage isn’t going away any time soon. Of these two, Persimmon is my pick.
