Hard truths for builders

SCRUTINEER

Persimmon

608.5p – 41.5p

Barratt

294.25p -36.75p

PERSIMMON, Britain's leading housebuilder, raised the storm cones across the building sector yesterday with shocking numbers on house sales that sent shares reeling across the board. As with Royal Bank of Scotland, much has changed recently at Persimmon – and dramatically for the worse – since the full-year results in February. The outlook then was for flat prices and a small volume slippage of up to 5 per cent.

Now the group tells shareholders that sales so far in 2008 are down 24 per cent year-on-year to £1.4billion. Visitor numbers to its sites were encouraging in March, but interest from potential buyers was torpedoed after the Halifax warned of a 2.5 per cent drop in house prices. Total sales volumes for 2008 are now expected to be £1.4bn, compared with £1. 8bn last year.

These are appalling numbers, and with anecdotal evidence of even further deterioration in recent weeks, there are major questions over sales and margins. Little wonder building on planned new sites has been shelved until the mortgage market improves – and there is little prospect of that in the near future.

Shares in Persimmon, already severely battered as the implications of the credit crisis on the UK housing market hit home, slumped a further 41.5p, or 6.4 per cent, to 608.5p, taking the fall from their 2007 high to 66 per cent.

With borrowings at end March of £1.03bn, the group says its committed facilities provided comfortable headroom for the seasonal peak debt requirements in April. But analysts see little such comfort at rival Barratt. Its shares tumbled 36.75p, or 11 per cent, to 294.25p, to take the fall from the 2007 high to 74 per cent. Market watchers now fear a rights issue will be needed soon to restore its balance sheet.

What should investors now do? ABN AMRO analyst Mark Howson repeats his "sell" rating on Persimmon. He now warns downgrades of at least 25-30 per cent are required on forecast 2008 earnings per share of 92.8p.

Citigroup Aynsley Lammin, is more sanguine, even while warning that it is difficult to predict the timing of any recovery in the housing market and that conditions look set to continue to be very weak. Nevertheless, he is maintaining his "buy" advice on Persimmon, having recently cut a pre-tax profit forecast to £275 million for this year, from £585m reported in 2007. "While the group cannot avoid the weakening market," he points out, " its management, strong balance sheet and land bank should leave it relatively well placed to manage its way through these difficult times."

There is really little investors can do other than to sweat it out. And it may prove a long wait given latest figures from the banks showing mortgage approvals running 44 per cent down on last year. With further interest rate cuts likely to be slow and measured, it may not be until the third quarter that a recovery in mortgage supply sets in, and well into next year prices pick up. But the shares at current levels are already discounting a long recession for the sector.

SENIOR managers and staff at Scottish & Newcastle held their Last Hurrah on Wednesday evening with a splendid farewell dinner for chairman Sir Brian Stewart at Edinburgh's Royal College of Physicians.

This was a bitter-sweet affair. While the group did well to push the Carlsberg-Heineken consortium to a final bid of £8 a share, it was a victory heavy with a sense of loss for a 250-year-old company and the S&N corporate name which has been a feature of the Scottish quoted company list since 1960.

But a remarkable skill that enabled S&N to survive and prosper for the length of time it did was the timing of its disposals as much as for its acquisitions. It got out of Thistle hotels at the right time, sold Center Parcs at a thumping profit and got out of pubs before the big decline set in. By the end there wasn't much of the "traditional" business left for investors to mourn. Beers, brands and businesses came and went.

By the end S&N had built a highly successful beer marketing and distribution partnership with Hartwall reaching into Russia, eastern Europe and India: an outstanding example of successful globalisation. But "Shareholder Value" can never make good the memories of a proud Scottish business.

The survival of its values and esprit de corps owed much to the popular Stewart. "S&N has been and is Sir Brian Stewart," declared chief executive John Dunsmore in his tribute, "and that makes this evening all the more remarkable."

I'll miss the company. And I'll miss the man.