Housebuilders have been one of the great investment plays since the 2008/09 recession, delivering huge rises in share prices and masses of dividends. However, housebuilding is a highly cyclical boom-and-bust industry and current valuations suggest to me that it’s time to be fearful when others are greedy.
The table below shows some data at annual results dates for FTSE 100 housebuilder Persimmon (LSE: PSN) going back to the years before the last crash.
| Market cap (£bn) | Book value (£bn) | Net profit (£m) | P/B | P/E | Operating margin (%) | Share price (p) | |
| 27/2/2017 | 6.26 | 2.74 | 625 | 2.3 | 10.0 | 25 | 2,030 |
| 23/2/2016 | 6.24 | 2.46 | 522 | 2.5 | 12.0 | 22 | 2,029 |
| 24/2/2015 | 5.06 | 2.19 | 372 | 2.3 | 13.6 | 18 | 1,650 |
| 25/2/2014 | 4.46 | 2.05 | 257 | 2.2 | 17.4 | 16 | 1,463 |
| 25/2/2013 | 2.72 | 1.99 | 170 | 1.4 | 16.0 | 13 | 898 |
| 28/2/2012 | 2.13 | 1.84 | 109 | 1.2 | 19.5 | 10 | 705 |
| 01/3/2011 | 1.36 | 1.74 | 115 | 0.8 | 11.8 | 8 | 452 |
| 02/3/2010 | 1.28 | 1.62 | 74 | 0.8 | 17.3 | 4 | 424 |
| 03/3/2009 | 1.13 | 1.56 | (625) | 0.7 | n/a | 11 | 375 |
| 26/2/2008 | 2.28 | 2.35 | 414 | 1.0 | 5.5 | 22 | 760 |
| 26/2/2007 | 4.41 | 1.84 | 396 | 2.4 | 11.1 | 21 | 1,473 |
| 27/2/2006 | 4.17 | 1.69 | 345 | 2.5 | 12.1 | 23 | 1,416 |
As you can see, before the last housing crash, Persimmon was posting record profits, operating margins were in the cyclically high 20s and P/Es were temptingly ‘undemanding’. But the share price had almost halved, even as it was reporting a record net profit of £414m in February 2008. And halved again by the time it reported a £625m loss a year later.
As you can also see, the ideal time in the cycle to buy is when operating margins and profits are depressed, P/Es are high (or off the scale, as at the time of the £625m loss) and P/Bs are below one, indicating a discount to net assets.
However, we’re now back to top-of-the-cycle operating margins in the 20s, record profits, undemanding P/Es but high P/Bs. In fact, at today’s share price of 2,800p and incorporating H1 numbers, the operating margin is 28% and the P/B is 3.2 — unprecedented highs.
I don’t believe “it’s different this time.” And with UK personal borrowing at its highest level in history, interest rates set to rise, and house prices already falling in London, I see substantial downside risk. As such, I think the time has come to switch to rating Persimmon a ‘sell’.
Lok a stock I’d buy
I’m more optimistic about the valuation and prospects of UK self-storage specialist Lok’n Store (LSE: LOK), which released results today for its financial year ended 31 July. The shares are up 2% at 370p, giving this AIM-listed company a market cap of £108.5m. With the company having posted a net profit of £3.1m, the P/E is 35 and an 11% increase in the dividend gives a yield of 2.7%. Meanwhile, its book value at year-end was £89.1m, so the P/B is 1.2 — or 1.1, adjusting for the fair value of the leasehold portion of its property estate.
Lok’n Store’s self-storage facilities are used by household and business customers. It also has a revenue stream from serviced archive and records management and an income from managing self-storage units for third parties. It reckons the attractive dynamics in its market include being “resilient through economic downturns.” It said today that its expanded new store pipeline will add 45% more space over the coming years. It added that this creates “a strong platform for an exciting period of rapid growth.”
Based on its modest P/B and prospects of “rapid growth” (including growth in book value), I rate Lok’n Store a ‘buy’.
