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Persimmon - profits rise on higher house prices

Matt Britzman, Equity Analyst | 2 March 2022 | A A A
Persimmon - profits rise on higher house prices

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Persimmon plc Ordinary 10p

Sell: 1,846.50 | Buy: 1,848.00 | Change 1.00 (0.05%)
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Total group revenue grew 8.4% to £3.6bn, as completions rose 7.1% and average selling prices rose 2.8% to £237,078. Positive pricing and cost control meant underlying profit before tax grew 12.7% to £973m.

The group expects to deliver volume growth of 4-7% for full 2022, with margins remaining stable despite cost inflation.

The annual dividend of 125p is due to be paid alongside a 110p payment of surplus capital.

The shares rose 5.9% in early trading.

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Our view

Impressive cost control meant profits grew at a faster rate than sales, as the group capitalised on what is a very strong UK housing market. Forward sales are down a fraction on last year but crucially, that means the end of the Stamp Duty holiday and the new phase of the Help to Buy scheme don't seem to be having a major impact.

Persimmon's industry-leading margins are 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 it's important to note the ability to offset inflation is predicated on house prices rising further, which isn't guaranteed.

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 13,700 acres on the books. 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 20,000 new plots and 480 acres of strategic land 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 low interest rates by historical standards mean mortgages are still relatively 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.

We should also mention interest rates. Although still historically low, they are rising. If these rise faster than expected, it could take some of the heat out the housing market, as mortgages become less affordable.

If the economy and house prices can hold up in the medium term, there should be plenty of cash available to be returned to shareholders. The prospective dividend yield of 10.4% reflects the group's policy of paying excess cash to shareholders and is covered by free cash flow. That means investors should be rewarded when times are good but there are no guarantees, the opposite could occur should performance take a turn. It's worth noting though that Persimmon's is currently trading a touch over the ten-year average valuation.

Persimmon key facts

  • Price/Book ratio: 2.11
  • 10-Year Average Price/Book ratio: 2.09
  • Prospective dividend yield (next 12 months): 10.4%

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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Full Year Results

Strong mortgage availability and low interest rates helped average private sales rates per site increase around 9%, up 22% on 2019 levels. The group delivered 14,551 new homes, with 12,018 to private owner occupiers and 2,533 to housing association partners.

Cost controls and improved pricing helped offset rising input costs, allowing underlying operating margins to increase from 27.6% to 28.0%.

The group added 20,750 plots of land over the year, taking the current owned and under control total up from 84,174 to 88,043. The value of the land assets was £1.8bn at the end of the period, up from £1.7bn the previous year.

Forward sales are down a touch on last year, at £2.2bn from £2.3bn. That includes over 6,200 private occupier homes with an average selling price of £259,350.

£75m has been set aside to help pay for cladding removal and fire safety issues, with 33 developments identified as needing work done.

Net cash at the end of the period stood at £1.2bn, with money owed to land creditors increasing £78.3m to £407.6m, reflecting increased buying over the past year.

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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.


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