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Persimmon - Sales remain strong

Equity research team | 2 November 2016 | A A A
Persimmon - Sales remain strong

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Persimmon plc Ordinary 10p

Sell: 1,854.00 | Buy: 1,855.00 | Change 8.50 (0.46%)
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Sales remain strong

Persimmon revealed a continuing strong sales performance in the third quarter, covering the months following the EU referendum. The group are now fully sold up for the current year, with forward sales beyond 2016 of £757m, up 4% on last year.

The shares were broadly flat following the announcement.

Our View

Post-referendum data has painted a confusing picture of the housing market to say the least. Mortgage approvals slumped in August and September, and house price growth has slowed dramatically. Throughout the period though, housebuilders have continued to report strong sales and higher levels of interest versus a year previously.

We suspect Help to Buy might provide some explanation. The government's scheme was designed to encourage building, so offers such as the equity loan only apply to new build houses. That could be supporting demand in the new-build sector in which house builders operate - providing the industry with a cushion the rest of the housing market lacks.

In the near term there are also other factors supporting the housing market too. Brits still want to own homes and the UK still faces a major housing shortage. The Bank of England moved quickly and decisively to cut interest rates, and it looks as though, barring a full-blown sterling crisis, rates will stay lower for even longer. If rates stay at this level mortgage affordability will remain high.

However, Persimmon acknowledges that Brexit does make its business more uncertain in the near future and a downturn would clearly impact the group.

Fortunately it has a stronger balance sheet than at the time of the last crisis, and its strategy of developing plots from the existing land bank rather than buying up new land seems a sensible one. The group could also benefit from its limited exposure to the London and South East markets, which some analysts have predicted could be at most risk.

With less cash tied up in land purchases, cash generation should be healthy. This should, in turn, help Persimmon stick to its 110p per year dividend out to 2021. At present, the shares offer a prospective yield of 6.7% and trade on a forward price to book ratio of 1.9x, a significant premium to the historic average.

Third Quarter Results:

The group say that summer trading was encouraging, with the number of customers visiting sites well ahead of last year. Customer activity has strengthened in the autumn, in line with seasonal trends, with private sales up 19% on 2015. Second half operating margin is expected to represent an improvement on the 23.8% achieved in the first half.

Persimmon attribute the continued strong performance to resilient consumer confidence and strong lender support, with August's interest rate cut and the Help to Buy shared equity scheme further supporting affordability.

Having opened 108 new housing developments in the first half, Persimmon have so far launched 102 new sites in H2, with a further 45 sites expected to open before the end of the year. The group acquired 7,580 plots during the period, for a total spend of £116m. However, 55% of replacement land acquired this year has been delivered from the strategic land portfolio.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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