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Persimmon - Quality focus lowers volumes

Sophie Lund-Yates | 15 January 2020 | A A A
Persimmon - Quality focus lowers volumes

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Persimmon plc Ordinary 10p

Sell: 2,396.00 | Buy: 2,397.00 | Change 8.00 (0.33%)
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Persimmon sold 4% fewer houses than last year, as management focussed on improving build quality. The group is now trending ahead of the four star threshold for the HBF's customer satisfaction survey.

The group anticipates pre-tax profits will be in line with market expectations.

The shares were broadly flat following the announcement.

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Our view

Persimmon's focus remains on addressing build quality and customer care problems.

The initiative's bearing fruit and the group now looks set to achieve four star status from the House Builders Federation. Although sales have taken a hit as the group slows the release of new homes, we think it's a sensible move long term.

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 has built up a strong net cash position. It's not difficult to see why the shares trade on 2.8 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. And, while the recent election has provided more certainty over the UK's future direction, any future economic shock could quickly dismantle profits in the sector.

The shares currently offer a prospective yield of 8.4%, 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 seems to accept the current level of returns is exceptional.

Despite the blips in build quality, we generally find Persimmon's performance impressive. However, as profits are tied to the economy's broader performance and to house prices, we think a healthy dose of caution is needed, especially given the stock's premium rating.

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Full year trading update

Full year revenue of £3.7bn is 2.4% less than last year, reflecting the slower roll out of new homes, and actions being taken to improve quality and service.

The group completed a total of 15,855 properties, compared to 16,449 last year. That includes a lower level of private sales - 12,463 new homes (2018: 13,341), with the average price of £241,975 up 1.5% on the previous year. Meanwhile, affordable homes sold for an average of around £119,150, compared to £117,653 last year. The group's overall average selling price was broadly flat at around £215,700, and the proportion of affordable sales rose from 18.9% to 21.4%.

The group has a forward sales position of around £1.4bn, down slightly on last year, and operates out of around 365 developments. Persimmon secured over 9,900 new plots of land during 2019 and plans to open around 80 new sites in the coming year.

After returning £748m to shareholders during 2019 the group holds around £844m of cash on the balance sheet.

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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 disclosure for more information.