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Persimmon - completions fall 33%, but beat expectations

Persimmon's full-year average weekly private sales rate fell from 0.69 to 0.58...

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Persimmon's full-year average weekly private sales rate fell from 0.69 to 0.58, largely due to the impact of high interest rates and the removal of the Help-to-Buy scheme.

Average private selling prices rose by around 5%, reflecting a change in the mix of houses sold. The use of incentives offered to buyers doubled from around 2% to 4%.

Persimmon's order book has grown 2% to £1.1bn. The group has around £420mn of cash, down from £862mn.

Total completions of 9,922 new homes came in ahead of group expectations, but were down by a third on the prior year. These lower volumes coupled with stubborn build cost inflation mean operating profit margins are set to roughly halve to around 14%.

There was a "strong improvement" in fourth-quarter sales rates, but Persimmon expects market conditions to remain highly uncertain throughout 2024. Build cost inflation is easing which should benefit the number of new home completions.

The shares rose 2.7% following the announcement.

View the latest Persimmon share price and how to deal

Our view

Despite the difficult trading backdrop, Persimmon's valuation's been on the charge in late 2023. And while we're not calling for a step-change improvement in fortunes for 2024, easing interest rates, lower build-cost inflation, and strong responses to marketing efforts are all early positive signs heading into the new year.

But even after the fourth quarter improvement, sales rates remain significantly lower than the prior year. That's led Persimmon to hold fire on investing in new land - something we expect to continue across the year as the group sharpens its focus on preserving cash. The group's able to do this due to its extensive land bank, which is amongst the biggest compared to peers.

To help boost cash levels again, the dividend is expected to remain at its current level, which suggests around 60p in total for the full year. If that remains stable into next year too, that'd put the current forward yield at around 4.3%. Of course, no dividends are ever guaranteed.

Market forecasts suggest a 35% fall in revenues for 2023. And factoring in the cocktail of headwinds, operating margins are expected to fall from 26% to 14%. That's not wonderful, but housebuilders are cyclical businesses that go through periods of ups and downs. And as Persimmon's houses are typically cheaper than the UK average, its selling prices may prove slightly more resilient than some competitors.

Persimmon has a strong balance sheet with margins in the middle of its peer group. There are also the in-house materials businesses, which we see as a key differentiator and should offer some relief to inflating costs. This vertical integration gives quick and cheaper access to key materials. For example, 55% of the bricks used are sourced in-house, giving a £2,000 saving per plot. That's a key advantage when inflation's running hot.

We also see reasons to remain positive on the long-term fundamentals of the UK housing market. The nation faces a housing shortage, all major political parties are committed to further housebuilding, and mortgage markets look to be stabilising to some degree. House price rises might stagnate in the years ahead, but Persimmon has the land to hike volumes when the market does turn.

Given the pressures, it's not surprising to see the valuation below its longer-term average. But broadly speaking, Persimmon's trading at a premium to most of its peers, which we see as a reflection of underlying strengths. The group looks to be in as robust a position as it could be for now, but at the current valuation, we prefer other names in the sector.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 10th January 2024