Blackfriar: Property companies moving forward into the sunlight

York-based Persimmon this week said debt stood at £15.2m at the end of June. This is the same housebuilder that had £1.2bn of borrowings in April 2008.

Persimmon’s journey to virtually eradicating debt is all the more impressive in that it remains the only major UK housebuilder not to have asked shareholders for cash through a share issue during the downturn.

Sheffield’s Henry Boot also reported solid progress on slashing debt, yesterday revealing it moved to a net cash position at the end of June. That compares with debt of £70m at the end of 2007 and gearing of 39 per cent.

Both of these companies have endured pain to get to this position, cutting jobs and streamlining.

But they have emerged far more robust than many would have thought possible at the depths of the recession.

“In generality I think UK PLC is not in bad shape,” said Henry Boot finance director John Sutcliffe. “But it’s the first time in my working life that I recall the banks and the Government being on their knees at the same time. I don’t think that Government is offering any support to the country.

“I don’t blame the Government – the profligacy of the previous government meant we have got to have this period.”

Whoever is to blame, both Persimmon and Henry Boot reflect the new vogue among many UK companies.

They are stronger, often with cash on their balance sheets, and many have developed an innate aversion to debt.

Stung by the experience of being beholden to their lenders, they have decided that for the time being at least, debt can wait.

“We’ve taken our gearing down from getting on for £50m to where we are today with no debt in order to be in a position to benefit (from a recovery),” said Mr Sutcliffe.

He believes pent-up demand for housing will eventually blow the lid on depressed house sales.

Key to this will be a recovery in mortgage availability, and a general return to much higher loan-to-value mortgages. But until then, Henry Boot is content to wait for a recovery.

“We’re a nation where the suppliers of housing are building to order,” said Sutcliffe. “Nobody out there is building on spec.

“People living in rented would like to buy a property, I’m absolutely convinced of that.”

While a housing recovery will require a loosening of purse strings by lenders, it will also need confidence from would-be homeowners that the time is right to make this huge financial commitment. With the cost of living rising and real wages falling, that confidence is by no means certain.

Many companies have now recapitalised and are awash with cash. Freeing up this cash is essential for economic growth.

But businesses’ understandable unwillingness to spend beyond their means and incur debt – much like many households – also threatens to form a vicious cycle for the economy.

DON’T be seduced by our interim profits – the first in four years – was UK Coal’s blunt health warning this week.

The Doncaster-based miner returned to the black with pre-tax profits of £22.1m for the first six months of the year, compared with £93.2m losses a year earlier.

It was boosted by more reliable mining and achieving higher prices for its coal.

“It’s a good start to what’s going to be a long march to recovery for UK Coal,” said turnaround expert and executive chairman Jonson Cox. “We need fundamental reform.”

Debt remains one of the coal miner’s biggest problems. Property sales helped to cut net debt to £207.3m at the end of June, versus £242.4m at the end of 2010.

However, without the benefit of land sales, its net debt actually grew marginally, due to increased in working capital.

“The priority remains for the business to generate cash,” it said.

“Although property does, and will, remain an important part of the business it is neither a panacea nor an excuse to ignore the issues within the underlying mining business.”

One swallow does not make a summer, and Mr Cox, the refreshingly frank former managing director of Yorkshire Water, knows better than to declare victory after £22m of profits.

UK Coal has yet to get to a sustainable position of making a profit on every tonne of coal it sells.

Ahead lies a tricky face change at Daw Mill deep mine, hopefully mitigated through simultaneous mining of panels, as well as another round of “robust and difficult” negotiations with its unions.

It needs to cut the cost of sending its workforce down the mines, as well as increasing the amount of time they can cut coal for.

Cox made it clear that if he cannot get the unions’ support, he will have to force through the changes.

Modernising UK Coal will be a painful process. But with a £207m debt millstone around its neck, alternatives are scant.