Half-year results justify optimism at Persimmon 

Persimmon (LSE:PSN)’s previous actions have left it with much to build on, especially given clearly improving market conditions for the housing sector.

It is probably too early to be calling a full recovery, but it is also fair to say that some of the previous headwinds are showing signs of turning into tailwinds.

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Build cost inflation, for example, which had been a bugbear and peaked at around 10% a couple of years ago, has been slowly decreasing and indeed is now broadly flat in the year to date. Part of this has been achieved through Persimmon’s unique ability to manage costs through its ownership of brick, tile and timber frame factories which guarantees a cost-effective and resilient supply of building materials. 

The group is also encouraged by the new government’s early announcements on the sector in general, and particularly with regard to planning, which had previously hampered opportunities for growth. Although such amendments will take time to wash through, Persimmon has noted a bounce in planning permissions since the government took office last month.

At the same time, the recent interest rate cut in the UK had already sparked the mortgage market into life, with the possibility that affordability becomes less of an issue, especially for first-time buyers where Persimmon has had a traditionally higher exposure.

Overall, an improvement over the Spring selling season, coupled with the company’s own increased marketing efforts, especially in digital, have also had an impact. Net private sales per outlet per week rose to 0.71 from a previous 0.59, an improvement of some 20% for which the momentum is currently being maintained. The forward order book, which now stands at £1.12 billion, is 28% higher than the previous year in another example of an improving backdrop.

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In addition, new home completions rose by 5% to 4,445, and the company has adjusted its guidance for the full year to 10,500, at the top end of a previous range of between 10,000 and 10,500, with an average selling price which has added 3% to £263,000. Equally, a decline of 3.2% over the last year in land prices has enabled Persimmon to continue its selective buying approach, and the company has recharged its coffers with a spend of £195 million, boosting the likelihood of further real returns.

It is certainly not all plain sailing, however, and some overhang from the challenges of the previous year remain in evidence. Underlying operating profit was flat at £152.3 million, while pre-tax profit fell by 3% to £146.3 million, albeit comfortably ahead of the expected £129 million. Revenues painted a rather more positive picture, with a rise of 11% propelling the figure to £1.32 billion, again well ahead of estimates of around £1.2 billion.

The balance sheet also remains in good shape, with net cash of £350 million and access to liquidity if required of a further £750 million. The group announced an unchanged dividend, where a yield of 3.9% is less remarkable compared to some of its peers, although the move will be seen as prudent given both the recent challenges and indeed Persimmon’s need to protect its capital position.

In all, there are any number of glimmers of light emerging which should position Persimmon well in the months ahead. Quite apart from the group’s own actions, an improving economic backdrop, alongside higher mortgage availability and affordability should work well in tandem with an energised planning process.

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In the meantime, there remain areas of damage to repair, while the current Competition and Markets Authority probe into potential price collusion and poor build quality overhangs the sector. The share price remains down by 47% over the last two years, but the more recent hints of optimism have led to a strong run of late, with the shares having risen by 34% over the last year, as compared to a gain of 8.5% for the wider FTSE100.

With prospects for the sector on increasingly firm foundations, the initial share price reaction to the release has been positive despite a weak opening for the wider market, leading to the possibility of an upgrade to a market consensus which currently stands at a 'hold', albeit a strong one.