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Persimmon - upbeat on housing market despite fall in profit

First half revenue fell 8.2% to &1.69bn, driven by lower completions as delays in planning consent hold back new outlet openings.

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First half revenue fell 8.2% to £1.69bn, driven by lower completions as delays in planning consent hold back new outlet openings.

Underlying operating profit fell 8.8% to £440.7m. Higher house prices offset build cost inflation but a relative increase in operating costs, partly due to lower completions, pushed operating margin lower.

The group continues to target around 10% growth in outlets and 14,500-15,000 completions for the full year.

The shares were broadly flat 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.

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, and production's ramping up to leverage those benefits.

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. 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 north of £400m on new land and developing existing sites in the first half. The rate of buying is slowing though, from the peaks seen last year and that's likely a reflection of conditions that aren't quite as accommodative as they have been.

For now, the markets still plenty hot enough to offset build cost inflation, though. That means if completions ramp up as expected in the second half, operating margins could benefit along the way. But with the cost of living still on the rise and a prolonged economic downturn looming, weakness on the demand side of the equation could upset things.

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 if 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 12.4% reflects the group's policy of paying excess cash to shareholders. Investors should remember though, those payments can and will change when conditions shift the other way and a yield that high suggests markets expect that shift to come sooner rather than later.

Recent 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.

Half Year Results

The group delivered 6,652 new homes (2021: 7,406) at an average selling price of £245,597, up 4% on the prior year. Of the group's completions, 5,553 were sold to private occupiers, at an average price of £267,325, with the remaining 1,099 sold to housing associations at an average price of £135,813.

Build cost inflation was around 8-10% for the period. Expanded production at the in-house brick, tile and timber frame factories, is further enhancing supply resilience and cost efficiency.

The group is over 90% forward sold for the current year, and the forward order book stands at £2.32bn. Average private sales rate in the period was 1% higher year-on-year.

Land investment increased by £304.6m to over £2.10bn and work in progress investment rose £172m to £1.23bn. The group increased its owned and under control land holdings to 89,052 from 88,043 plots as at 31 December 2021. 37,771 of these plots benefit from detailed planning consents and are under development.

There was a £61m free cash outflow, as the group stepped up investment in land and work in progress. The free cash outflow, plus £399m paid in respect of 2021 dividends, meant net cash fell from £1.2bn at the beginning of the year to £772m. The group had land creditors of £493.8m (December 2021: £407.6m).

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
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th August 2022