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ii view: Persimmon profit forecast unchanged but investors are buying

Shares in this major UK housebuilder have underperformed rivals year-to-date, although reaction to this third-quarter update has been positive. We assess prospects.

7th November 2023 11:55

by Keith Bowman from interactive investor

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Third-quarter trading update to 6 November

  • Home completions down 37% year-over-year to 1,439
  • Net private sales per outlet down 24% to 0.48
  • Forward sales down 23% to £1.62 billion

Guidance:

  • Now expects full-year completions of around 9,500, up from a previous 9,000
  • Full-year build cost inflation expected to be around 8% to 9% 

Chief executive Dean Finch said:

"Trading in the period was in line with expectations and pricing was broadly stable. While the near term is likely to remain challenging and we remain disciplined on costs, we continue to position the business for growth when the market recovers, as demonstrated by our further progress on planning in the period. The Group's national network of outlets providing a high-quality product at a range of attractive prices is a crucial strength in this market."

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ii round-up:

Against a backdrop of higher borrowing costs, housebuilder Persimmon (LSE:PSN) today left its full-year profit expectation unchanged, with forward sales down 23% year-over-year to £1.62 billion. 

Net private sales per site per week fell 24% from the same time last year to 0.48, although had improved over the last five weeks to 0.59 compared to 0.45 this time last year. Build completions this year are now expected to be around 9,500 compared with a previous prediction of 9,000, with build cost inflation moderating over recent weeks and expected to benefit 2024 performance. 

Shares in the FTSE 250 company rose by more than 6% today, having come into this latest news down around a tenth year-to-date. That’s in contrast to gains of a similar size for rivals Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.) and below a 5.7% retreat for the FTSE 2500 index in 2023.

Persimmon operates across 30 UK regional offices and three offsite manufacturing facilities, where it makes items ranging from timber frames and roof systems to bricks and tiles.  

Pricing for its homes had remained broadly stable, although with an increased use of incentives needed to generate forward sales, particularly in the South where customer affordability constraints are at their greatest.

Accompanying management outlook comments pointed to highly uncertain market conditions during 2024, but with recent planning successes supporting the potential opening of 30  new sites during the spring of next year. 

A full-year trading update is scheduled for 10 January. 

ii view:

Started in 1972, sales for the York headquartered housebuilder are today made via its Persimmon Homes brand itself, along with both Charles Church and Westbury Partnerships. Build completions in 2022 totalled 14,868, with the FTSE 250 company focused on the more affordable end of the market and in particular first-time buyers. Homes sold under its Persimmon brand sell at an average of 25% below the national average new home selling price based on HM Land Registry data. 

For investors, customer affordability constraints persist, with borrowing costs up and previous government backed assistance schemes such as ‘help-to-buy’ now no more. Required sales incentives will also pressure profit margins, planning challenges across the UK generally persist, while the environmental impact of building new homes continues to warrant consideration. 

More favourably, demand for new homes persists, with UK interest rates possibly now at or around their peak. Build cost inflation looks to have eased given both reduced demand for materials and an easing of global supply issues. Potential for new industry assistance under a new UK government should also not be forgotten, while an estimated price-to-net asset value of one now sits comfortably below the three-year average, suggesting the emergence of better value.  

In all, and while some caution remains sensible, a forecast dividend yield of over 5.5% may be enough to keep income investors happy, while others will continue seeking clues that the worst is over for housebuilders.  

Positives

  • Broadly stable selling prices
  • Expects year-end cash balance of £300m-£500 million

Negatives

  • Uncertain economic outlook
  • Previously reduced shareholder returns

The average rating of stock market analysts:

Hold

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