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Persimmon - Pricing remains 'firm'

Nicholas Hyett, Equity Analyst | 29 April 2020 | A A A
Persimmon - Pricing remains 'firm'

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Persimmon plc Ordinary 10p

Sell: 2,696.00 | Buy: 2,698.00 | Change -64.00 (-2.32%)
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In the six weeks to 26 April, Persimmon made 962 gross private reservations and 948 legal completions. The forward sales position, including legal completions taken to date in 2020, is £2.4bn, compared with £2.7bn last year.

Persimmon has begun reopening its construction sites.

The shares were broadly flat in early trading.

View the latest Persimmon share price and how to deal

Our view

Prior to the coronavirus pandemic, Persimmon's focus had been on addressing build quality and customer care problems. Now, as the country is in lockdown, management will be devoting its energy to getting construction and selling activity back up and running safely.

We doubt many people will be rushing to move house this summer. At the moment it looks like any decrease in demand is expressing itself through falling sales volumes, but not falling house prices. The question is, what happens next?

It's possible that volumes rebound as we exit lockdown and the housebuilders carry on largely as before, but it's also possible house prices fall instead. In our opinion, the speed and nature of the economic recovery is key here. If households still have the spending power and confidence to make big purchases like houses, then we'd expect Persimmon to bounce back fairly smoothly. On the other hand, if we enter a recession and potential home buyers are feeling the pinch Persimmon could be in trouble.

Fortunately, Persimmon seems to be holding onto its cash. The group hasn't needed to draw down on its revolving credit facility and cash balances have only dropped by around £10m since 20 March. This is positive news, especially as the group has reduced the amount it's contractually obligated to spend on land by £32m this year. The dividend has also been suspended.

It's worth remembering that the risk for the housebuilders isn't really an acute cash flow problem in the short term, as their balance sheets are much stronger than in 2008. Instead builders have huge amounts of money tied up in land and partially completed homes, and the real risk is that they won't be able to sell these at a profit. This would hurt profits in the long term, but it's not the short term cash squeeze some sectors are facing.

There are a few reasons to be cheerful though. The long-term fundamentals of the UK housing market are still attractive. The nation faces a housing shortage, all major political parties are committed to further housebuilding, and mortgages are relatively affordable.

Prior to today's update, Persimmon shares changed hands for 2.2 times book value, slightly above the long-term average of 1.8 times. However, there's a risk book value could be written down in the near future. As most of Persimmon's assets are tied to house prices, if prices head south asset values will have to be written down.

If Persimmon can come through the current crisis avoiding more permanent damage, then we think the long-term outlook is positive. But investors should go into the next few months aware of the risks and with their eyes open.

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Trading update

Prior to the lockdowns, Persimmons average sales rate is around 10% higher than the same period last year. The average selling price of homes in the forward order book is £244,500, ahead of £238,750 at the same time last year. Management described selling prices as "firm".

Persimmon currently has £600m in cash and a further £300m in undrawn credit. However, the group has previously agreed to spend another £163m on land this year. While dividend payments have been suspended for the time being, this policy will be reassessed in the second half of the year.

Find out more about Persimmon shares including how to invest

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.