Interactive Investor

Covid hits Persimmon, but firm has strong foundations

3rd March 2021 10:47

Richard Hunter from interactive investor

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The housebuilder’s second half had strong momentum, spilling over into 2021.

Much as the pandemic left its indelible mark on the results, housebuilder Persimmon (LSE:PSN) has recovered strongly and is now building on strong foundations.

The first half of the year incorporated a full lockdown for several months, during which time the company sought to batten down the financial hatches as operations ceased, according to its 2020 results today.

By the same token, the performance in the second half was strong, and this momentum has spilled over into the new financial year. Average weekly sales are up by 7% in the first eight weeks and a forward order book of £2.3 billion represents an improvement of 15% from the previous year.

At the same time, there are several tailwinds working in the company’s favour, such as low interest rates, mortgage availability and a general housing shortage all providing opportunities.

Any further schemes emanating from the Budget could also pave the way for enhanced returns. In any event, the sector as a whole learned the painful lessons of the great financial crisis of over a decade ago and has come into the latest challenges in much better shape.

Despite the restrictions of the past year, Persimmon has amassed cash of £1.2 billion as compared to £844 million a year before. The average selling price of homes has risen by 7% to around £231,000, with underlying new gross margins of a formidable 31%.

Given this backdrop, the current dividend yield of 4.1% will be bolstered by a further payment in March, propelling the prospective yield to around 8.7%, representing something of a return to previously generous levels.

However, there will still be challenges to come, not least of which is the fallout from the eventual removal of government support schemes to individuals which could lead to a spike in unemployment and a collapse of consumer confidence, hardly an ideal environment for the housing market.

At the same time, the company is working hard to repair the reputational issues it was facing going into the pandemic, and it could yet be some time before consumer confidence in the company is fully restored.

In terms of the numbers, pre-tax profit fell to £784 million from £1 billion a year before, and revenues dropped to £3.3 billion from £3.7 billion. New home completions were down by 14% and, although the company is striving to plug the gap, these are not expected fully to return to 2019 levels until next year.

The share price has also had a rollercoaster year. Despite a spike of 75% since the March lows of 2020 as the pandemic kicked in, the shares remain down by 5% over the last year, as compared to a decline of 1.5% for the wider FTSE 100.

However, immediate comparisons with the previous year will become easier and there is little question that Persimmon is seeing the benefit of continued momentum from a strong end to 2020.

As such, the market consensus of the shares as a strong ‘buy’ is likely to remain in place, having also recently strengthened to make Persimmon as the preferred play in the sector.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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