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Persimmon - Sales offices reopening

Nicholas Hyett, Equity Analyst | 14 May 2020 | A A A
Persimmon - Sales offices reopening

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Persimmon plc Ordinary 10p

Sell: 2,292.00 | Buy: 2,294.00 | Change -46.00 (-1.97%)
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Persimmon will re-open construction sites and sales offices following updated guidance from the government. Around 65% of production capacity has now been restored, with sales offices in England to reopen on 15 May. Operations in Scotland remain closed.

The group has secured 1,351 private reservations and 1,300 legal completions in the eight weeks to 10 May. Cancellations remain in line with historic trends.

The shares fell 3.6% in early trading.

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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.

While building houses under social distancing protocols is no doubt a challenge, our real concerns revolve around what the current crisis has done to demand. We doubt many people will be rushing to move house this summer, and whether sales pick up now that sales outlets are back open remains to be seen.

It's possible that volumes will rebound as we exit lockdown and housebuilders carry on largely as before, but it's also possible that's at the cost of lower house prices. 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 only dropped by around £10m between 20 March and 29 April.

However the risk for the housebuilders isn't really an acute cash flow problem in the short term, since 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. That could lead to writedowns in the book value of some assets.

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 record low interest rates mean mortgages are cheap.

Prior to today's update, Persimmon shares changed hands for 2.1 times book value, slightly above the long-term average of 1.8 times. However, the risk of writedowns should not be overlooked, and if book value is set to fall the stock could be more expensive than it looks at first glance.

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 - 29 April 2020

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.

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.

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