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Persimmon - volumes down but in line with expectations

Nicholas Hyett | 7 November 2019 | A A A
Persimmon - volumes down but in line with expectations

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Persimmon plc Ordinary 10p

Sell: 2,647.00 | Buy: 2,649.00 | Change -83.00 (-3.05%)
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Sales volumes are lower year-on-year, as the group continues to focus on improving build quality. Trading over the summer was in line with expectations, with the usual rise in activity in Autumn.

The shares rose 3.3% following the announcement.

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Our view

Persimmon's the latest housebuilder to be hit by a build quality scandal.

A flurry of complaints means sales are taking a hit, as the group slows the release of new homes in response. Not ideal, but we think it's a sensible move, and it's not what investors should focus on.

Wider operational performance has been strong, with margins knocking around the 30% mark, which is well above those of peers. That's partly driven by Persimmon's disciplined approach to land, which sees it acquire more profitable plots. The balance sheet is also in better health than when the financial crisis hit - Persimmon has a deep land bank for future development and, officially it has built up a strong net cash position. Even the "unofficial" debt of money owed to land creditors is declining.

It's not difficult to see why the shares trade on 2.3 times book value, well above the longer term average of 1.7.

But that doesn't mean Persimmon's home and dry, it's being buoyed by factors it doesn't control. Things like mortgage affordability, record employment and Help to Buy all support housing demand - 52% of private sales were to first time buyers in the first half of the year.

But Help to Buy is due to end in 2023. And with such a large chunk of sales relying on government help, investors will want to know how Persimmon plans to bridge any gap in sales rates. Added to that looming deadline, is Brexit uncertainty. If the UK's exit from the EU turns nasty, the housing market would feel the pain. Housebuilder profits could quickly look a lot less sustainable.

The shares currently offer a prospective yield of 10.3%, which is attractive - especially since the payments look secure in the short term. Bear in mind though that dividend plans currently only stretch to 2021, and beyond that it's unclear what will be paid out. No dividend is guaranteed, and even management seem to accept the current level of returns is exceptional.

Despite the blips in build quality, we generally find Persimmon's performance impressive. However, all the political and economic uncertainty around means we think a healthy dose of caution is needed, especially given the stock's premium rating.

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Third quarter trading details

Completed sales volumes fell 6% compared to last year to 7,584, as Persimmon releases properties for sale at a later stage of the build. This approach is set to continue in the second half, although volumes are expected to improve slightly on normal seasonality.

Lower sales volumes also means the number of active outlets has dropped 5% to around 350 sites.

The average weekly private sales reservation rate, per site reached 0.67 - in line with last year. The current year is completely forward sold, and forward sales beyond 2019 are worth £950m. Sale prices remain firm.

Persimmon secured over 3,700 new plots of land in the quarter, spending over £170m, including payment of deferred land creditors.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.