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Persimmon - demand slows over the fourth quarter

Persimmon completed 14,868 homes in 2022, 2% higher than the previous year and toward the top end of guidance.

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Persimmon completed 14,868 homes in 2022, 2% higher than the previous year and toward the top end of guidance.

Higher costs were offset by improved efficiency and house prices, which were up 5% on average over the year, to £248,600. Higher prices were seen across both private and Housing Association developments.

Sales rates across the year were down to 0.69 private net sales per outlet per week, from 0.83 the prior year. Customer demand was "notably weaker" in the second half, which fed into sales rates of 0.30 in the final quarter. This, plus higher cancelations, pushed forward sales down from £1.6bn to £1.0bn.

Land spend for the year was up from £460m to £665m and the group had 87,200 plots at the end of 2022, down from 88,043 the prior year. Persimmon slowed the pace of buying over the fourth quarter and plans to take a cautious approach over 2023, investing only in "the very best opportunities".

Cash at the end of the period stood at £860m, down from £1.25bn.

The shares were broadly flat in early trading.

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's completed on more homes in 2022 than the prior year.

2023 is a much murkier picture. The current dip in house prices could well be the start of a bigger correction, and sales volumes have begun showing real signs of weakness over the fourth quarter and into the start of the new year.

Analyst consensus suggests a 22% potential fall in revenues this year. Factoring in price decreases, operating margins are expected to fall from 26.6% to 22.4%. That's not wonderful, but housebuilders are cyclical businesses that go through periods of ups and downs.

Persimmon has a strong balance sheet with industry leading margins, which should help weather the coming change in cycle. There are also the in-house materials businesses, which offer a degree of vertical integration where materials are concerned. It's pleasing to hear production at these sites is getting a push to relieve as many of those cost pressures as possible.

We also see 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 mortgages markets look to be stabilising to some degree. 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.

Over the near term, the news could well get worse before it gets better though. Some of that's already priced into the valuation which has come under significant pressure so far this 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.

The real question is, how much is left to come off and the upcoming Spring selling season will be as important as ever to help judge the new state of the market.

One thing looks pretty set though, despite coming down already the 8.6% prospective yield is under pressure 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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Article history
Published: 12th January 2023