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Persimmon - 2022 on track, volume & prices to fall in 2023

Persimmon says it's on track to deliver target completions of 14,500-15,000 homes this year, with build rates up...

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Persimmon says it's on track to deliver target completions of 14,500-15,000 homes this year, with build rates up 20%. The Group's also been mitigating cost inflation of between 8% to 10% with higher selling prices.

However, the group cautions that cancellation rates have jumped to 28% in the last 6 weeks, from 21% in the 12 weeks prior.

Average weekly sales per outlet were down 23% to 0.6 units between 1 July and 7 November. This has fallen to 0.48 in the last 6 weeks, which Persimmon puts down to recent political uncertainty and a deterioration in the economic outlook. Average selling prices are also down 2% in the last 6 weeks compared to the rest of the period.

Persimmon would not give specific guidance for 2023. But given the "recent and rapid change" in market conditions expects both completion levels and average selling prices to deteriorate. Forward orders for the year ahead are down 33% to £0.77bn.

The Group expects to end 2022 with cash down 10.5% to £700m, following £750m of capital returned to shareholders over the year.

Persimmon has disclosed a new capital allocation policy. Going forward dividends will be well covered by post-tax profits. Other areas of focus include continued land acquisitions and keeping balance sheet risk low.

The shares were down 7.8% following the announcement.

View the latest Persimmon share price and how to deal

Our view

Given the cocktail of soaring interest rates and inflation that housebuilders are having to digest, its impressive that Persimmon seems on track to hit its 2022 sales targets. However, even for 2022 it's not out of the woods yet, with prices starting to wane, and the numbers of customers pulling out of transactions on the rise.

2023 is a much murkier picture. The current dip in house prices could well be the start of a bigger correction, and just how much volumes might fall also remains to be seen.

We have no doubt there will be a squeeze on operating margins- one of Persimmon's key attractions.

Persimmon invests considerable cash in its strategic land bank - land which hasn't yet got planning permission - with some 13,300 acres on the books at the half year.

Relative to its book value, Persimmon's valuation is sitting at close to 10-year lows. The true break-up value of Persimmon's net assets (£33.6bn at the half year), could be considerably higher if further planning consent is granted to its land holdings. The current valuation prices in precious little for the ability of the ongoing business to generate shareholder value.

Analyst consensus suggests a 12% fall in revenues next year, factoring in price decreases as gross margins are expected to fall from 30.5% to 27.3%. That suggests revenue reduction will be price led. Let's say things get much worse, with both prices and volumes falling 10% below what forecasts imply. We still believe that Persimmon would be able to generate an operating profit in that scenario, albeit a small one.

That's not wonderful, but housebuilders are cyclical businesses that go through periods of ups and downs. Persimmon has a strong balance sheet, and there are reasons to remain positive on the long-term fundamentals the UK housing market. 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. There are also signs that the interest rate peak won't be as high as initially feared. House price rises might stagnate in the years ahead, but Persimmon has the land to hike volumes when the market does turn.

Persimmon's increased its provision for cladding removal and remediation more than four-fold to £350m. Whilst this is disappointing, this is a multi-year program so won't be an up-front cash hit. We hope that this guidance won't have to be raised again in the future.

Over the near term, the news could well get worse before it gets better. Some of that's already priced into the valuation which has come under significant pressure so far this year. The real question is, how much is left to come off and the market's reaction to the recent trading update suggests there may be more pain ahead.

One thing looks pretty set though, the 14% prospective yield is sure to be overstated, following the new asset allocation policy. How much will only become clear when the full year results are published.

Persimmon key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 8th November 2022