ii view: lots to like, so why are Persimmon shares down?

Holding cash, buying land, and offering a dividend yield of over 8%. Buy, sell or hold?

Trading update from 1 July to 8 November

• Average private new home sales reservation rate per site up 16% on 2019
• Cash of £895 million as of 31 October, down from £960 million (2020)
• £1.15 billion of forward sales reserved beyond the current year

Guidance:

• Expects to deliver 10% increase in full year 2021 legal completions, up from 13,575 in 2020

Chief executive Dean Finch said:

"Persimmon continued to perform well through the period against a backdrop of healthy demand, with private sales reservation rates per site remaining well ahead of 2019, as sales followed a more normal seasonal pattern as expected when compared to 2020.”

ii round-up:

This latest update from housebuilder Persimmon (LSE:PSN) for the four months since July offered broad reassurance. 

Customer demand remained robust with the York headquartered builder on track to grow full-year new home sale completions by 10% compared to 2020’s 13,575 completions.  

Average private sales reservations per site for the period were 16% up on the pre-pandemic 2019, with £1.15 billion of forward sales reserved beyond the current year and cash held of £895 million.

Persimmon shares fell by around 2% in UK trading, having gained by over 70% since pandemic induced market lows in March 2020. Shares for rival Barratt Developments (LSE:BDEV) are up by a similar amount, while shares for smaller players Crest Nicholson (LSE:CRST) and Redrow (LSE:RDW) have risen by more than 85% over that time.   

Persimmon operates from 31 regional offices throughout the UK. Its brands are Persimmon Homes itself, Charles Church and Westbury Partnerships. 

Following previous build quality issues, its most recent customer satisfaction survey scoring has risen to over 92%, suggesting that prior issues have been overcome. 

Around £380 million has been spend on land year-to-date with management confident that it has maintained its high-quality return requirements. 

Its next trading update is scheduled for 13 January. 

ii view:

Persimmon is the largest housebuilder by value listed on the UK market. It has broad UK coverage, with low exposure to the south-east and London, although relatively high exposure to ‘Help to Buy.’ Chief executive Dean Finch took the helm as of late September 2020. Like many rivals, Persimmon has also been returning excess capital to shareholders over recent years, although in Persimmon’s case, returns had been halted given the uncertainty of the pandemic, but now recommenced. 

For investors, supply chain challenges are adding to build cost inflation, while UK interest rates are likely to rise as the Bank of England looks to contain inflation. A price-to-net asset value ratio of 2.5 times is also comfortably above rivals such as Barratts and Taylor Wimpey (LSE:TW.) at under two times, suggesting the shares are not obviously cheap. Persimmon is also more exposed to Help to Buy and buyers at the lower end of the housing ladder, which is a risk when interest rates begin to rise. 

But demand for new houses remains robust, and cost inflation is being countered by higher selling prices and prior moves to manufacture its own raw materials. Land buying opportunities are still being found, while recent government changes to curtail house buyer assistance have not hindered the sector. In all, and with the shares sat on an historic and estimated future dividend yield of over 8%, income seekers are likely to remain interested. 

Positives

• Forward sales of over £1 billion
• Attractive dividend payment (not guaranteed)

Negatives

• Economic outlook uncertainty
• Previously halt dividends under the pandemic

The average rating of stock market analysts:

Buy