Persimmon full year revenue fell 2.4% to just under £3.7bn as the group sold fewer houses and average selling prices stayed flat compared with last year. As a result, profit before tax fell 4.5% to £1.0bn.
The group proposed full year dividends of £2.35 per share to be paid in 2020 and 2021.
The group also announced that its CEO, Dave Jenkinson, will step down once a suitable replacement can be found.
Shares fell 5% in early trading.
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 reasonable health - Persimmon has a deep land bank for future development and has built up a strong net cash position.
Given these factors, it's not difficult to see why the shares trade on a premium at 3.1 times book value, well above the longer term average of 1.8. However, the valuation is the highest it's been in two decades, and that makes us a little nervous - a reversal in fortunes could be painful.
That's particularly true because Persimmon's currently being boosted by factors it doesn't control. Things like mortgage affordability, record employment and Help to Buy all support housing demand - 50% of private sales were to first time buyers in 2019.
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 8.0%, 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.
Full Year Results
Persimmon sold 15,855 homes in 2019, a decrease of 4% on 2018. The average selling price was broadly stable at £216k, although the group's private sales went for an average of £242k, an increase of 1.5% year on year. 3,392 homes were sold to housing associations for an average of £119k, compared with 3,108 for an average of £118k in 2018.
Underlying operating margins fell 0.5 percentage points to 30.3% as the group invested in build quality and customer care initiatives.
Forward sales fell slightly from £2.02bn to £1.98bn. So far this year sales rates are around 7% higher than last year, with the group continuing to release homes for sale at a more advanced stage of construction than they have in the past.
Persimmon controls 93,246 plots of land, down from 99,088 last year, of which 46,055 have planning permission. This equates to 5.9 years supply at 2019 build rates.
Net cash decreased from £1.05bn to £835m, reflecting an increase in work in progress investments. Land creditors fell to £435m from £548m in 2018.
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.