Persimmon plc (PSN) Ordinary 10p
HL comment (27 April 2022)
Private sales reservation rates in the current period are 2% up on 2021 levels, as demand for new build homes continues to outstrip supply and mortgage availability remains high.
As expected, completions in the first half will fall shy of last year. The timing of outlet openings means they'll be weighted toward the second half of the year. However, the group remains on track to deliver full-year volume growth of 4-7%, whilst maintaining margins.
In addition to the scheduled dividend of 125p made in April, a further payment of 110p is set to be returned on 8 July 2022.
The shares fell 1.7% following the announcement.
Entering the year with a relatively low number of active outlets means first half performance will be subdued, but the group's pressing on with outlet openings and land buying so it can take full advantage of ongoing robust demand in the market. Forward sales are down a fraction on last year, but crucially that means the end of the Stamp Duty holiday and the new phase of the Help to Buy scheme don't seem to be having a major impact.
Persimmon's industry-leading margins are one of its key attractions. Rising material and labour costs are a thorn in the side, but one that the group appears to be dealing with well thanks to its in-house materials businesses. These are a real benefit and help with supply chain control, an area that's been a lingering issue for builders, albeit one Persimmon see easing. It's important to note the ability to fully offset inflation is reliant on house prices remaining high, which isn't guaranteed.
The other margin-booster at Persimmon is the way it buys land. 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.
Persimmon joined its peers in signing the government's fire safety pledge, which has been looming over the sector. It's pleasing to see the £75m previously set aside for works doesn't need to be increased - that should largely put the issue to bed.
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.
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 11.0% 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
- Price/Book ratio: 1.92
- Ten year average Price/Book ratio: 2.1
- Prospective dividend yield (next 12 months): 11.0%
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.
First Quarter Trading Update
Persimmon remains on track to open 75 outlets during the first half of the year, which'll help bolster the relatively low number the group entered the year with. Around half are already active, bringing total outlets to around 300.
Forward sales including legal completions stands at £2.8bn (2021: £3.0). That reflects the lower number of outlets coming into the year. The average selling price for private homes rose 5.6% to £266,000, which is outstripping the effect of rising costs.
Around 6,600 new plots were bought into the group's land holdings, replacing almost half of last years developed plots.
The group's manufacturing facilities continue to help mitigate supply chain pressures and rising build costs. Though the group mentioned supply chains pressures looked to be easing somewhat.
At 22 April 2022, the group held cash of £446m, with £160m of deferred land creditors and access to £300m of credit.
Whilst the outlook remains positive, the group warned of "shorter-term uncertainties, particularly regarding consumer confidence, cost inflation, rising interest rates, the cessation of Help to Buy and the impact of the tragic conflict in Ukraine."
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
Previous Persimmon plc updates
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