ii view: Persimmon profits fall

Housebuilder Persimmon sees costs rise and build volumes fall as it navigates quality issues. 

First-half results to 30 June 2019

• Revenue down 4.5% to £1.75 billion
• Pre-tax profit down 1.4% to £509.3 million
• Legal completions down 6% to 7,584
• Average selling price up 0.5% to £216,942
• A capital return payment of 125p per share was paid as an interim cash dividend

Chief Executive Dave Jenkinson said:

"Improving the quality and service delivered to our customers remains our top priority and I am encouraged with the progress made in the first half, which clearly shows that Persimmon is changing.

The improvements to our customer service approach had two main impacts in the period.  First, customer service spend increased by 40% year on year and these additional initiatives are anticipated to increase our annual customer care costs by an estimated £15 million. Second, and as noted earlier in the year, our decision to invest an additional £140 million in work in progress as we held back some sites for later sales release to give customers more accurate moving-in dates reduced the Group's overall sales volumes. Allowing for these impacts, Persimmon's trading in the first half of 2019 was strong."

ii round-up:

Headquartered in York, this housebuilder operates from 31 regional offices throughout the UK. Its brand names are Persimmon Homes, Charles Church and Westbury Partnerships. 

Persimmon (LSE:PSN) employs over 4500 personnel. It sold 16,449 new homes in 2018, 406 more than in 2017. 

The builder has also developed offsite manufacturing capabilities. Its Space4 business manufactures highly insulated timber frames, wall panels and roof cassettes. 

For a round-up of these half-year results, please click here.

ii view:

Build quality and customer service issues have helped leave Persimmon's share price trailing rivals recently. Barratt Developments (LSE:BDEV) and Berkeley Group Holdings (The) (LSE:BKG), for example, have both enjoyed share price gains year-to-date compared with a marginal fall for Persimmon. 

More broadly, a no deal Brexit and the Bank of England's estimate of a possible 30% fall in house prices top the list of investor concerns. A trend of softening profit margins because of moderating house price inflation and persisting cost inflation is also worthy of consideration. 

However, shareholder returns across the housebuilding sector, for now, remain a core attraction. A one-year forecast dividend yield of over 10% is enticing, while a forward price earnings ratio of under 7 is below both the three and the ten-year averages. But until the uncertainty of Brexit is removed, some investor caution appears justified. 

Positives

• Persimmon's is focused on regions outside of London and South East. 
• It has been returning surplus cash to shareholders. 
• Cash held at the end of June 2019 of £833 million (£1.05 billion Dec 2018)

Negatives

• Brexit uncertainty overhangs the housing market
• Help to Buy scheme due to end in 2023
• Increases in interest rates could reduce customer demand

The average rating of stock market analysts:

Buy