Shares digital

by Carlo Svaluto Moreolo

Several City analysts told clients to buy shares in Persimmon just days before the UK’s largest house builder by market value spooked the market with a profit warning. Number-crunchers were forced to take the red pen to existing estimates after Persimmon revealed that ‘the reduced level of demand is having a negative impact on margins’, due to an ‘unprecedented tightening in the mortgage market.’ However, for many analysts the UK’s largest house builder remains the key sector pick.

Three days before the profit warning (April 21), Rachael Waring of Panmure Gordon had upgraded Persimmon from hold to buy, while downgrading her 2008 EPS forecasts by 20% for the company. The recommendation upgrade was a reaction to the weakness in Persimmon’s share price over the previous days. After the profit warning Waring reiterated her buy stance on the company despite cutting EPS forecasts by another 13%.

As to whether Persimmon’s gloomy update was a surprise to analysts, Waring says: ‘I don’t think it was a surprise that Persimmon warned, what they said was pretty much in line with what we’d heard from Taylor Wimpey a few days earlier.’ She adds: ‘I think that perhaps what we’d overlooked was the extent to which the mortgage market had deteriorated since the start of April. It didn’t catch analysts out, but was probably a little worse than what had been factored into expectations.’

Waring’s target price for Persimmon, which she considers ‘the best quality house builder in the sector’, is set in line with the group’s last reported net asset value, 787p. The 30% upside she leaves for the shares is justified by the strong fundamentals, for instance a high forecast yield at 9.3% and a higher-than-average interest cover.

Mark Hake of Merrill Lynch left Persimmon as his only buy in the sector after posting a bearish note two days before the firm’s gloomy update. In that note he downgraded his recommendations for Barratt Developments , Bellway, Redrow, Bovis Homes and Taylor Wimpey, with the latter two now moved to his sell list.