Persimmon plc (PSN) Ordinary 10p

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Persimmon’s average weekly net private sales rate rose from 0.70 to 0.76 since the mid-year point, despite some “softening in the market since the summer”. The group called out continued affordability pressures and uncertainty ahead of the upcoming UK Budget as key challenges to contend with.

The order book rose by 15% to £2.8bn, driven by volume growth in both private and partnership sales. Average selling prices were up 1.5% to about £295,150, with buyer incentives stable at around 4-5%.

Full-year performance is expected to be in line with current market expectations, pointing to underlying pre-tax profits of around £429mn (2024: £395mn). Cash balances are expected to land between £0-200mn at year-end.

The shares rose 4.0% in early trading.

Our view

Persimmon delivered a strong update, showing that performance is ticking along nicely despite the challenging market ahead of the delayed UK Budget. Sales rates and orders have been on the rise, giving management the confidence to reiterate full-year guidance.

More broadly, performance has improved after a tough period a couple of years ago, and revenue trends have been encouraging over the past 18 months. Since Persimmon’s houses are typically priced around 15% below the newbuild national average, sales tend to be more resilient in times of uncertainty.

But while profits are improving, a few years of softer sales and higher costs mean the margin environment is still much tougher than it has been for most of the past decade.

Pressures are starting to ease, and top-line growth should offset low single-digit build cost inflation this year. The in-house materials businesses, which we see as a key differentiator, should help on this front, too. They give Persimmon better cost visibility, as well as quicker and cheaper access to key materials. When Persimmon can use its own bricks, tiles, and timber, it saves around £5,000 per plot.

Significant pent-up demand for homes in the UK remains unchanged. The new government is reforming the national planning framework to help remove some of the roadblocks for builders, and it is starting to have a positive impact. But it’ll likely be a while before these changes move the dial for housebuilders.

Persimmon’s substantial land bank is a key strength and should be a beneficiary of easier planning policies when they arrive. Given its low average selling prices and first-time-buyer bias, it would also be well-placed to benefit from any potential government support for homebuyers.

The balance sheet is still in good shape despite cash on hand being a decent clip lower than a couple of years ago. The dividend was rebased lower in 2022 to reflect the more difficult environment, a reminder that housebuilders are cyclical businesses, so performance tends to ebb and flow. But at current prices, the yield looks attractive - though never guaranteed.

With green shoots of a recovery emerging in the housing market, there’s scope for improving sentiment towards housebuilders. Persimmon’s valuation remains well below the long-run average, and the group remains one of our preferred names in the sector. But economic headwinds could delay activity in the sector from ramping back up into full flow.

Environmental, social and governance (ESG) risk

Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. 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 is also lacking.

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 LSEG. 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.

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