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Persimmon – lower volumes sees profits fall

Persimmon’s full-year revenue and profits take a hit as higher interest rates weigh on buyer affordability.
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Persimmon’s full-year revenue fell 27.5% to £2.8bn, driven by lower volumes as completions were down by around a third, to 9,922 new homes. This was partially offset by 2.9% higher average selling prices of £255,752.

Underlying operating profit came in at £0.4bn, down from £1.0bn. Lower volumes and high levels of build cost inflation saw underlying operating profit margins roughly halve to 14.0%.

There was a free cash outflow of £165.2mn compared to an inflow of £372.7mn in the prior year. Net cash position of £407mn, down from £851mn.

In the first ten weeks of 2024, average weekly sales rates of 0.59 have improved ahead of the prior year’s levels. Full-year completions are set to land in the range of 10,000-10,500 new homes.

Full-year dividend of 60p per share, in line with the prior year.

The shares fell 3.6% following the announcement.

Our view

Persimmon’s average weekly sales rate fell around 16% in 2023, as high interest rates and the removal of the Help-to-Buy scheme have weighed on buyer affordability. That’s put pressure on revenue and profits, which both fell at double-digit rates.

Although the near-term outlook for Persimmon and the housing market remains uncertain, the significant pent-up demand for homes in the UK remains unchanged. We’re not calling for a step-change improvement in fortunes for 2024. But easing mortgage rates, lower build-cost inflation, real wage growth and strong responses to marketing efforts are all early positive signs heading into the new year.

In a bid to preserve cash, Persimmon continues to hold fire on investing in new land - something we expect to continue across the year. The group's able to do this due to its extensive land bank, which is amongst the biggest compared to peers. Having this large pipeline means there’s less pressure to go out and buy new plots at a time when prices are yet to fully reflect the uncertain housing market. When the market does pick back up, Persimmon has the land to hike volumes quickly and benefit.

Market forecasts expect revenue to remain broadly flat in 2024. 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’s balance sheet remains in decent shape, 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 help operating margins head back in the right direction. This vertical integration gives quick and cheaper access to key materials. For example, 54% of the bricks used are sourced in-house, giving a £1,800 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 improving to some degree.

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.

Environmental, social and governance (ESG) risk

Most housebuilders are relatively low risk in terms of ESG. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.

According to Sustainalytics, Persimmon’s management of ESG risk is strong. The group collects and discloses scope 1, 2, and 3 emissions and has strong emission reduction plans in place. It has also committed to its homes being net zero carbon in use by 2030. However, there’s currently limited disclosure on what percentage of materials are recycled. Disclosures around product and service safety are also lacking.

Persimmon key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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: 12th March 2024