Operating in a sector deeply out of favour is clearly reflected in the performance of Persimmon's share price. Our head of markets explains the latest hit to confidence.
In different times, the current state of the housebuilding sector would be the cause of some celebration, with Persimmon (LSE:PSN) being one of the more favoured plays.
The group has a robust balance sheet and cash position, enabling it to continue with shareholder returns comfortably. The current eye-watering dividend yield of 12.6% is adequately covered, and is a clear invitation to investors.
At the same time, Persimmon has upped its game on land acquisition opportunities, having been relatively subdued compared to some of its peers around the time of the pandemic, and has invested £416 million so far this year, with its cash generative abilities providing further scope for expansion.
Forward sales are at a robust level of £1.87 billion, up by 3% on the previous year, and is 75% forward sold already for the year. Rising average selling prices are offsetting the impacts of cost inflation, up by 4% and by 12% on the forward sold properties. Persimmon therefore expects half-year profits to be slightly ahead of expectations.
For the longer term, the UK still has a housing shortage, mortgage availability remains high and relatively cheap by historical standards and there are no obvious signs from any of the political parties that the housing market is one with which they wish to tamper. In the meantime, Persimmon has a substantial strategic land bank which can be deployed at varying speeds, depending on circumstances.
Despite the unquestionable progress, the sector remains deeply out of favour, with a gaping disconnect between actual trading performance and share price performance.
The end of the stamp duty holiday, the wind down of the Help to Buy programme, supply chain blockages and the cladding issue have all weighed heavily. In addition, recent surveys are giving mixed messages on whether house price growth may be slowing and, inevitably, affordability concerns given the escalating cost of living crisis have added to the sector’s woes.
Persimmon has also noted additional current issues, such as planning system delays, material supply chain issues and labour shortages, all of which are impacting its ability to grow faster. Revenues are down by 8% in the year so far, and legal completions have fallen by 10%.
The company is battling those factors within its control – it has an in-house materials business which mitigates some of the supply chain issues, unlike competitors – but given the backdrop, investors may choose to accentuate the negatives within the statement.
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The shares have fallen by 39% over the last year, as compared to a marginal loss of 0.6% for the wider FTSE100 and now stand 43% down from the level achieved just prior to the pandemic.
The wider debate of whether the current economic challenges will signal the end of the housing market cycle, or merely a slowdown in rising house prices, will continue to rumble on. In the meantime, Persimmon has not lost the support of its followers with a longer term view, as evidenced by the market consensus of the shares remaining at a strong buy.
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