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Persimmon - demand remains healthy

Sophie Lund-Yates, Equity Analyst | 9 November 2021 | A A A
Persimmon - demand remains healthy

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Persimmon plc Ordinary 10p

Sell: 1,849.00 | Buy: 1,850.00 | Change -9.00 (-0.48%)
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Persimmon's average third quarter private sales reservation rate was 16% ahead of 2019 levels. That reflects ''supportive market conditions'', including ''good levels'' of demand, mortgage availability and low interest rates.

New home completions are still expected to come in 10% above 2020 levels at the full year. 2019 volumes aren't expected to return until 2022.

The group expects margins to remain ''resilient''. Build cost inflation is expected to be around 5% for the full year.

Persimmon shares were unmoved following the announcement,

View the latest Persimmon share price and how to deal

Our view

Persimmon continues to see strong demand for new homes along with positive pricing conditions. Forward sales for houses currently under construction are expected to come in above pre-pandemic levels by the time we reach the full year. Crucially that means the end of the Stamp Duty holiday and the new phase of the Help to Buy scheme don't seem to have put buyers off.

We view Persimmon's industry-leading margins as one of its key attractions. Rising material and labour costs are a thorn in the side of margins, but one that the group appears to be dealing with well, thanks to its in-house materials businesses. These are a real benefit, but the tough cost environment is still something to keep in mind. Exactly what the harsh inflation will mean for profitability is yet to be seen.

The other margin-booster at Persimmon is the way it buys land. 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 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. Now the outlook's brighter it's back in the market - bringing in over 16,000 new plots so far this year.

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: 2.4
  • 10-Year Average Price/Book ratio: 2.0
  • Prospective yield (next 12 months): 8.9%

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 update

The group said trading is returning to traditional seasonal patterns after the disruption caused by the pandemic. It noted that the market has seen limited effects from the changes in the Help to Buy scheme and end of the stamp duty holiday.

Persimmon has £1.15bn of forward sales reserved beyond the current financial year, up from £0.95bn at the same point in 2019.

The group spent £180m on new land during the period, taking the year-to-date figure to £380m. So far this year, they've added 16,200 new plots to the business.

Build rates are at pre-pandemic levels, despite industry wide planning delays. Persimmon's in-house brick, tile and timber companies are helping it to offset some of the supply chain and cost pressures facing the industry. Overall, the group said it's: ''mindful of the evolving challenges as a consequence of Brexit and the continuing concerns relating to the pandemic on cost inflation and the supply chain and their impact on interest rates, consumer confidence and the UK economy''.

As of 31 October 2021, the group held £895m of cash and has access to £300m of undrawn credit.

Find out more about Persimmon shares including how to invest

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.

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