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Persimmon - revenue down but profits on track

First half revenue fell 8.2% to £1.69bn, reflecting fewer deliveries due to planning delays and material...

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First half revenue fell 8.2% to £1.69bn, reflecting fewer deliveries due to planning delays and material and labour shortages.

A 4% increase in the average selling price offset rising build costs. That means despite fewer completions, Persimmon's expecting profits at the half year to be modestly above expectations.

The group's expecting to deliver between 14,500 and 15,000 completions this year, but the group expects supply chain issues and a planning backlog to persist.

Shares were down 6.3% following the announcement.

View the latest Persimmon share price and how to deal

Our view

Entering the year with a relatively low number of active outlets meant first half performance was always expected to be subdued. But additional supply chain snarls and planning hold ups meant Persimmon's top line was thinner than it could have been. These headwinds are expected to persist, a departure from the optimistic tone management struck on supply chain issues in the last trading update.

This will also put pressure on operating margins-- one of Persimmon's key attractions. Luckily, the group's in-house materials business means it'll be more insulated than some peers, but the labour shortages will cut the same and planning holdups are a Persimmon-specific problem.

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, forking out a further £314m on new land opportunities in Q1. However those opportunities could be slow to move the needle if they're held up in a planning bottleneck.

This should, in theory, be a near-term problem for Persimmon once planning officers have caught up. In the meantime, the group's seeing the benefits of a red-hot property market offset build cost inflation. That's expected to keep profits above expectations at the half. But with the cost of living still on the rise and a prolonged economic downturn looming, an about about-face on the demand side of the equation is looking more likely.

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 as long as planning delays clear.

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 12.8% 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 those payments can and will flex when conditions shift the other way.

Recent market concerns around higher input costs, buyer affordability and cladding mean valuations for the entire sector have come under fire. That could offer an attractive entry point for Persimmon, which currently trades below the ten-year average valuation.

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.

Trading Update

During the first half, Persimmon's average private weekly sales rate, per site, was about 1% ahead of last year. The group's now 75% forward sold for the full year, with forward sales up from £1.82bn to £1.87bn.

Persimmon delivered 6,652 houses at an average selling price of around £245,600 during the period. This reflected a 4% price increase but a 10% volume decline thanks to material and labour shortages as well as planning hold ups. The volume decline is expected to bring operating margins lower.

The strong performance in 2020 and 2021 meant Persimmon started the year with around 290 outlets, on the low end. The group started construction on an additional 65 outlets during the period.

The group highlighted a further 1,500 plots due to come to market over the next 5 years are held up with planning delays associated with the pandemic.

As at 30 June, Persimmon held £0.78bn in cash with £125m in land creditors.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 7th July 2022