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Persimmon - good results and foundations for the future

Nicholas Hyett, Equity Analyst | 18 August 2021 | A A A
Persimmon - good results and foundations for the future

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Persimmon plc Ordinary 10p

Sell: 2,732.00 | Buy: 2,735.00 | Change -117.00 (-4.11%)
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Housebuilder Persimmon reported revenues of £1.8bn, up 54.6% year-on-year. That reflects a 51.1% increase in sales and 4.9% increase in average selling price to £236,199.

Profit before tax rose 64.2% to £480.1m, reflecting more modest growth in operating expenses.

Total dividends paid in the half came to 235p per share, up on the 110p paid in relation to the prior financial year. The board will return to pre-covid capital return plans in 2022, with a planned distribution of 125p per share in early July 2022 and any additional surplus capital returned in March/early April.

Persimmon shares fell 2.6% in early trading.

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Our view

While Covid safety is an ongoing concern, Persimmon is actually trading ahead of pre-pandemic levels.

Sales rates for the first six months of the year are ahead of where they were last year and 20% ahead of 2019 figures. It's a similar story in forward sales for houses currently under construction. Crucially that means the end of the Stamp Duty holiday and the new phase of the Help to Buy scheme doesn't seem to have put buyers off, which bodes well for the future.

The well-publicised rise in house prices has also offset growing inflation in building material and labour costs - helping Persimmon to grow what were already industry leading gross margins. Quiet some achievement, and testament to what we see as one of Persimmon's key attraction versus others in the sector.

Persimmon invests considerable cash in its strategic land bank - land which hasn't yet got planning permission - with some 100,000 plots currently on its books or under option. This land is far cheaper than land ready for building, and clever buying and development activity means profits margins are ultimately higher when the homes are eventually sold.

The group was more cautious with its land-buying activity during the crisis than some of its peers. But is quickly making up for that now - more than replacing the houses it's built in the last six months with new plots bought or shifted out of the strategic portfolio. Given how damaging a major housing downturn could be to results, a little caution is no bad thing.

More broadly we think 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. The return of 95% mortgages could help buoy demand further. And while house price rises might stagnate in the years ahead, Persimmon has the land to hike volumes to compensate.

If the economy and house prices can hold up in the medium term, we think the outlook for Persimmon could be positive. It's worth noting though that Persimmon's industry leading margins do mean it's currently more highly valued than its listed rivals.

Persimmon key facts

  • Price/Book ratio: 2.6
  • 10-Year Average Price/Book ratio: 2.0
  • Prospective yield (next 12 months): 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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Half Year Results

Persimmon saw 7,406 new home sales complete in the first half, with the group operating from 300 outlets. Sales rates are 30% ahead of 2020, reflecting pandemic related shutdowns in 2020, but also 20% ahead of 2019.

The higher average selling price reflects both a change in the types of houses sold and higher market prices. Of the group's completions 6,104 were sold to private occupiers, at an average price of £258,220, with the remaining 1,302 sold to housing associations at an average price of £132,959.

The group reported cost inflation during the year, both in materials and labour. However, good cost management and higher prices meant the group actually improved gross margins year-on-year to 27.6%.

Persimmon added 10,272 new plots during the period including 4,788 from the strategic land bank, that's equivalent to 140% of production in the half. The group's land bank now stands at 85,771, with an additional 14,600 acres in the strategic land portfolio with the potential to deliver 100,000 new homes. Land spend in the year came in at £200.4m.

Free cash flow in the half came in at £482.5m, up from a £10.2m outflow in the same period last year, reflecting higher profits and improved working capital flows now that sites are up and working again. The group finished the half with net cash of £1.3bn, up from £819.6m this time last year. Including land creditors, the group reported net cash of £940.6m, up from £490.3m.

Forward sales were up 9% on 2019, at £2.2bn.

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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.