Interactive Investor

ii view: Persimmon confident about strength of UK housing market

27th April 2022 11:17

Keith Bowman from interactive investor

An estimated dividend yield of over 10% combined with industry-leading profit margins. Buy, sell, or hold?

Trading update from 1 January to 26 April

Chief executive Dean Finch said:

"The UK housing market remains supportive and Persimmon is well-placed for the future, with a strong and experienced senior management team, positive momentum in outlet openings, improving build quality and customer service and growing land holdings with industry-leading embedded margins. 

“While we remain mindful of current uncertainties, particularly regarding consumer confidence, rising interest rates and the impact of the tragic conflict in Ukraine, the Board is confident of the Group's future disciplined growth and success."

ii round-up:

The UK's biggest housebuilder by stock market value Persimmon (LSE:PSN) today reported trading in line with management expectations.

Private average sales rose 2% compared to the same period last year with build completions expected to accelerate during the second half.

Persimmon shares retreated by around 1% in UK trading, bringing their fall year-to-date to around a quarter. Shares for rivals Taylor Wimpey (LSE:TW.), Bellway (LSE:BWY), Vistry Group (LSE:VTY) and Redrow (LSE:RDW) are all down by a similar amount. The FTSE 250 index has fallen by close to 13%.

The housebuilding industry has been battling rising cost inflation, hundreds of millions of pounds set aside for cladding provisions, rising interest rates as well as the cost-of-living crisis.

The housebuilder’s total order book value currently stands at £2.8 billion, down from 2021’s £3 billion due to the slower opening of sale sites year-to-date. 

The average private selling price rose 5.5% to £266,000 compared to 2021, with Persimmon continuing to find land buying opportunities as it added approximately 6,600 plots during the quarter.

Accompanying outlook comments pointed to an expected full-year build volume growth of between 4% to 7% compared to 2021, while maintaining its industry-leading profit margins. 

ii view:

Persimmon is headquartered in York and operates from 31 regional offices throughout the UK. Its brand names are Persimmon Homes, Charles Church and Westbury Partnerships. It employs over 5000 people and completed 14,551 new homes in 2021, up from 13.575 in 2020.

Chief executive Dean Finch took the helm late September 2020, with current Aviva (LSE:AV.) executive Jason Windsor set to become chief financial officer in the summer. Like many rivals, Persimmon has also been returning excess capital to shareholders over recent years, although returns were halted and restarted because of the pandemic. 

For investors, rising UK interest rates to battle an inflation surge and a cost-of-living crisis for consumers are a concern. A price-to-net asset value at close to two times for Persimmon is also comfortably above rivals such as Barratt Developments (LSE:BDEV) and Bellway at under one, suggesting the shares are not obviously cheap. 

On the upside, demand for new homes appears robust, house price increases are helping counter rising build costs and a £75 million provision to cover cladding costs has already been taken. For now, and with the shares offering an estimated dividend yield of over 10%, attraction for income orientated investors is likely to remain. 

Positives

  • Forward order book of £2.8 billion
  • Attractive dividend payment (not guaranteed)

Negatives

  • Economic outlook uncertainty
  • Previously halt dividends under the pandemic

The average rating of stock market analysts:

Buy

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