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Persimmon - demand normalises

Sophie Lund-Yates, Equity Analyst | 13 January 2021 | A A A
Persimmon - demand normalises

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Persimmon plc Ordinary 10p

Sell: 2,799.00 | Buy: 2,800.00 | Change 29.00 (1.05%)
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Persimmon's group revenue was £3.3bn for the full year, compared to £3.7bn in 2019, reflecting Covid-19 disruption and a lower number of completions. The group said a "robust" performance in the second half of the year "has mitigated some of the impact of the delays caused by the initial Covid-19 lockdown".

The group's level of work-in-progress as of 31 December 2020 was 5,600 equivalent units of new home construction, an 8% decline from the previous year. That reflects a lower number of active sales outlets and Covid-19 related disruption in the first half.

The shares fell 2.4% in early trading.

View the latest Persimmon share price and how to deal

Our view

Everything was put on the back burner in 2020, as the group shifted focus to restoring operations during the pandemic.

While Covid safety is an ongoing concern, Persimmon has been able to return to previous productivity levels, allowing things like build quality and customer care to take centre stage once again. These had been bugbears in recent years.

The group managed to make progress on its customer care initiatives towards the end of the year. Half of the group's private new home customers used Persimmon's Homebuyer retention scheme. These things don't tend to get a shoutout in the headline numbers, but are important if Persimmon wants to avoid another reputational scandal, which saw sales dip before the pandemic hit.

From our perspective, things are moving in the right direction. Sales rates returned to normalcy after spiking in the third quarter. This is reassuring - it suggests firm demand for new homes, despite renewed Covid restrictions.

With worries about build quality and operating during a pandemic mostly in the rear-view mirror, our primary concern is whether the third national lockdown will be the straw that breaks the precarious economic recovery. In a worst-case scenario, joblessness causes the housing market to weaken, putting housebuilders like Persimmon in a tough spot.

Builders have huge amounts of money tied up in land and partially completed homes, and the 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. The longer the market weakness persists, the more pressure it puts on housebuilders' balance sheets.

Persimmon has a strong balance sheet, and a healthy cash position as it stands. This provides a decent level of protection - but a worse-than-expected recession would deplete even the healthiest cash hoard.

Cash is important in any business, especially one that intends to pay dividends. And we suspect a lot of investors are interested in Persimmon's expected yield of 8.4%. But keep in mind, dividends are never guaranteed and a downturn could see payments cut or scrapped if Persimmon felt it needed to preserve cash in the face of a downturn.

The long-term fundamentals of the UK housing market are still attractive, though. The nation faces a housing shortage, all major political parties are committed to further housebuilding, and record low interest rates mean mortgages are cheap. So far, there's little evidence that the end to the stamp duty holiday will hurt demand and the government has been dutifully bridging the gap between the pre and post-pandemic economy.

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 it's still too soon to say the sector is fully in the clear, and ups and downs are to be expected in the medium term.

Persimmon key facts

  • 12m forward Price/Earnings ratio: 11.6
  • 10 Year Average 12m forward Price/Earnings:10.4
  • Prospective yield: 8.4%

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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Fourth quarter trading details

Average weekly sales rates for the second half of 2020 was 39% higher than the same period of 2019. The bulk of that increase came from elevated demand over the summer, as pent-up demand and the stamp duty holiday encouraged prospective buyers. The group's average weekly sales in the fourth quarter trended to more normalised levels.

Persimmon completed 13,575 new homes in 2020, the majority of which (8,675) were completed during the second half. The total number of completions in 2019 was 15,855. Build rates have recovered to pre-pandemic levels.

The group's average selling price increased 7% to £230,500, which can be attributed to a higher proportion of new homes being delivered to owner occupiers. For that group, the average selling price was up 3.7% to £250,900.

The group's forward sales position at the end of the year stood at £1.7bn, a 25% increase from the previous year. Persimmon is currently operating from around 300 active sales outlets, compared to 350 in 2019. Roughly ten sites are under construction, and a further 50 are planned to open during the first half of 2021.

Management said it was cautious with land-buying due to pandemic-related uncertainties. 6,700 new plots were added across 33 locations, spending £330m on land investments, including £220m worth of deferred land commitments.

As of 31 December 2020, Persimmon had £1.2bn in cash and an untapped £300m revolving credit facility.

Management says it's mindful of the potential challenges in 2021, including Covid restrictions and an end to the stamp duty holiday, but that evidence so far shows demand has been 'resilient'. The group plans to offer an assessment of the housing market on 3 March 2021 alongside it's full-year results.

The group returned £351m to shareholders in 2020.

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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.