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Persimmon - Sales trends improving heading into 2017

George Salmon | 5 January 2017 | A A A
Persimmon - Sales trends improving heading into 2017

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Persimmon plc Ordinary 10p

Sell: 2,714.00 | Buy: 2,717.00 | Change -13.00 (-0.48%)
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Sales trends improving heading into 2017

Persimmon's trading update, ahead of full year results due on 27 February 2017, shows an improving trend in sales and margins from the first half of the year to the second. The group head into 2017 with forward sales of £1.2bn, some 12% higher than last year. The shares rose by 2.3% on the news.

Our View

Post-referendum data has painted a confusing picture of the housing market to say the least. Despite some improvement recently, mortgage approvals remain depressed and nationwide house price growth has slowed. Throughout the period though, housebuilders have continued to report strong sales and high levels of interest.

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 for new builds and 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 their 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 low for the foreseeable future. If this proves to be the case, mortgage affordability will remain high.

However, Persimmon acknowledges that Brexit brings uncertainty in the short term. Fortunately, it has a stronger balance sheet than at the time of the last crisis, and its large land bank enables it to adopt a cautious approach to acquiring new land. It's also worth adding that the group has 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% (not a reliable indicator of future income) and trade on a forward price to book ratio of 1.9x, a significant premium to the historic average.

Details of full year trading update:

2016's revenues of £3.14bn were 8% higher than 2015, helped by a 4% increases in both in legal completions and average selling prices. The average home is now sold for £206,700.

Of the 15,171 completions, just over half (7,933) are from the second half of the year. Margins have also improved through the year as the group keeps a tight control on costs.

18,700 new plots were acquired during the year. Although it remains mindful of the risks associated with the uncertainty arising from the UK's decision to leave the EU, the group continues to see good opportunities to buy additional land.

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.