Interactive Investor

Persimmon has strong foundations, say investors

18th August 2020 11:07

Richard Hunter from interactive investor

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The lockdown hit the housebuilder hard, but shares have bounced back 70% and the market says ‘buy’. 

This year is increasingly looking to be a game of two halves for Persimmon (LSE:PSN), with the outlook rather brighter than the pandemic-blighted first few months.

The company had previously battened down the hatches in cancelling both ordinary and special dividends, while becoming more selective on new land acquisitions. 

The enforced quietening-down of the business during lockdown has inevitably had an impact on trading, with home completions down 35% year-on-year, revenues falling by 32% and pre-tax profit by 42%. In addition, the pandemic came at a time when Persimmon was dealing with issues of build quality and customer service, both of which threatened to tarnish its brand.

More broadly, events outside of its control could yet derail Persimmon’s fledgling recovery. 

A second wave of Covid-19 could potentially provide an unwelcome echo of previous months, while a recession in the UK may deter house buyers from entering the market now. 

Equally, the end of the furlough scheme could add to consumer caution in spending generally. Also, the terms of the UK’s exit from the European Union might not only impact economic sentiment but could also have more practical ramifications, such as the effect on the company’s supply chain.

Even so, the company has managed its position prudently and will be hoping that this half-year report draws something of a line in the sand. Even during lockdown Persimmon was able to continue with some sales using its virtual viewing facility. The company retained a healthy net cash position of £829 million and the extra flexibility provided by the dividend cancellations was further bolstered by access to liquidity, which it has not needed to draw down.

The current forward order book is particularly promising, standing at £2.5 billion, which represents a 21% increase compared to the same period last year. 

There is a return to normality for the moment in its build programmes and average weekly sales are strongly ahead. To be reintroducing a dividend at this stage, albeit at a much lower level which nonetheless implies a yield of around 3%, is a clear statement of management confidence in immediate prospects.

Indeed, a number of tailwinds remain in place which explain such optimism. Good mortgage availability, historically low interest rates, a housing shortage and government assistance in the form of the Help to Buy scheme and the current stamp duty holiday all play into the hands of the housebuilders.

Persimmon is regarded as a favoured play within the sector and, on the whole, this update underlines those credentials. 

The shares have recovered by 70% since the indiscriminate markdowns in March, and over the last year remain 42% ahead. This is a significant outperformance of the broader FTSE 100, which has declined by 14% over that period.

This potentially early return to form from Persimmon has been well received in early trade against a weak broader market, and the market consensus of the shares as a strong ‘buy’ seems safe on strong foundations.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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