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Persimmon - strong trading, limited land buying

Nicholas Hyett, Equity Analyst | 10 November 2020 | A A A
Persimmon - strong trading, limited land buying

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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: 2,777.00 | Buy: 2,779.00 | Change 41.00 (1.50%)
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Persimmon's third quarter private sales rate was 38% higher than in the same period last year, despite slightly higher cancellations. The group expects second half completions to be "at least in line" with 2019, and said house prices have remained "firm".

Persimmon has announced a second interim dividend of 70p per share and will update investors on its capital return plans alongside full year results in March.

The shares fell 3.6% 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 management will be devoting its energy to making construction and selling activity safe and as efficient as possible.

Progress has been encouraging, as sales rates have more than bounced back and house prices have stayed firm. Some of this will be pent up demand as people delayed moving during the lockdowns, but it's still reassuring to see.

While building houses under social distancing protocols is no doubt a challenge, our remaining concerns revolve around what the current crisis could do to demand if we enter a prolonged recession.

If households still have the spending power and confidence to make big purchases like houses in the next few quarters, then we'd expect Persimmon to recover fairly smoothly. On the other hand, if we enter an extended recession and potential home buyers are feeling the pinch Persimmon could be in trouble.

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.

Persimmon is also taking a relatively cautious approach to buying land compared to some of its peers. If the economic recovery stalls this will look sensible, but if everything goes well from here Persimmon will have missed out on the opportunity to buy at attractive prices.

There are 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. What's more, the Chancellor has cut stamp duty to support the market.

If the economy and house prices can hold up in the medium term, then we think the long-term outlook for Persimmon is positive. But investors should go into the next few months aware of the risks and with their eyes open.

Persimmon key facts

  • 12m forward Price/Earnings ratio: 12.1
  • Average 12m forward Price/Earnings ratio since listing (2012): 10.4
  • Prospective yield: 8.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

Persimmon is "fully sold up" for 2020 but has £1.36bn of forward sales in 2021 and beyond, which is 43% ahead of last year.

In the ten months to the end of October Persimmon spent £260m land, and added c.1,700 new plots.. This compares with c.7,300 plots at the same point last year.

At the end of October Persimmon had £960m in net cash and had committed to spending £325m on land. Of this, £70m is due to be spent this year. The group also has a revolving credit facility of £300m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.