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Persimmon - revenues rise but outlook uncertain

Persimmon saw total group revenues rise 6% to 3.8bn pounds.

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Persimmon saw total group revenues rise 6% to £3.8bn. This was driven by higher completions which rose 2% to 14,868 and average selling prices which increased by 5% to £248,000.

Underlying operating profit grew 4% to £1bn, as "careful" cost management helped mitigate build cost inflation of 8-10% through the year. This figure excludes a £275m adjustment related to expected costs for removing combustible cladding.

Net cash fell from £1.2bn to £851m as inventories increased. Free cash flow more than halved from £765m to £373m.

While sales rates rose to 0.52 in the first 8 weeks of 2023 compared to the end of 2022, this is still significantly below the 0.96 seen in early 2022. As such, full year completions are expected to land in the region of 8,000 to 9,000.

A final dividend of 60p per share has been announced, reflecting a cut of 74%.

The shares fell 7% following the announcement.

View the latest Persimmon share price and how to deal

Our view

Persimmon's continuing to feel the effects of a shaky housing market. While we're impressed there's been more home completions in 2022 than the prior year, the outlook for 2023 isn't so rosy.

The current dip in house prices could well be the start of a bigger correction. And sales volumes are showing real signs of weakness too, with early figures coming in significantly below 2022 levels. That's led the group to slow down investing in new land - something we expect continue across 2023 as the group sharpens its focus on preserving cash.

On the topic of preserving cash, Persimmon also slashed its 2022 dividend by 74%, down to 60p. The dividend is expected to remain rebased at this level, with a view to growing it over time. As ever there are no guarantees. With that in mind we see the prospective yield of 6.5% as challenging. While unfortunate, the reduced payout level may be a necessary evil. Especially as the group battles against high levels of build cost inflation.

Analyst consensus suggests a 34% potential fall in revenues this year. And factoring in the cocktail of headwinds, operating margins are expected to fall from 26.4% to 20.2%. 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 industry-leading margins, which should help weather the coming change in cycle. There are also the in-house materials businesses, which could offer a cushion to inflating prices 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 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. 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 over the last year. 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.

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: 1st March 2023