Once a favourite among income investors, the housebuilder has been forced to slash the payout amid worsening conditions. Our head of markets explains why the worst may be yet to come.
Housebuilder Persimmon (LSE:PSN) has ground out a creditable performance considering the challenges of the last year, although the current outlook is rather more troubling.
The private weekly sales rate is a case in point. This rate came in at 0.69 for the year, although in the last quarter the number fell to 0.3 (and as low as 0.19 following the mini-budget fiasco).
Following some marketing initiatives the rate has improved to 0.5 for the first few weeks of this new financial year, although this compares with 0.96 a year previous. The challenges are stark and likely to lead to a difficult 2023 for the sector as a whole, which has been reflected in some dismal share price performances across the piece.
Concerns over mortgage affordability given the cost of living crisis, mortgage availability amid rising interest rates, persistent build cost inflation of between 8% and 10% and shortages of both materials and labour, have created a toxic cocktail. In addition, Persimmon has taken a charge of £275 million (and is raising this to £350 million), which has had a material impact on a pre-tax profit number which reduced from £967 million to £731 million.
As such, the group has tightened its cost management and significantly reduced new land purchases, only acquiring land on a highly selective basis. More positively, some of the build cost inflation has been mitigated by the group’s vertical integration, with its in-house access to bricks, tiles and timber frames providing a competitive edge.
The dividend is also a casualty of the general belt-tightening exercise. A reduction from 235p to 60p for the year significantly reduces the previously mid-double digit yield, although the new projected yield of just over 4% remains attractive if low by recent historical standards. With some investment being required to maintain its land bank, net cash has fallen from £1.25 billion to £862 million, although this leaves a sufficient amount of firepower to continue its selective acquisition opportunities.
Given the backdrop, there are a number of factors which display Persimmon’s resilience in the face of an economic cycle which has turned against it. Underlying pre-tax profit rose to £1 billion from a previous £973 million and revenues increased from £3.61 billion to £3.82 billion, in excess of the expected £3.79 billion. In addition, average selling prices rose by 5% which provided a small tailwind, and new home completions rose marginally to 14,868 from 14,551, which is a notable achievement in the circumstances.
The underlying profit margin of 27.2% is largely in line with the previous year, but herein lies another potential issue. The company has guided that in the event of continuing inflation and, coupled with the level of sales currently being seen, this number could take a hit of anywhere between 5% and 8% in the current year, inevitably having a large effect on profitability. Based on the current environment, completions could also fall markedly to a range of between 8,000 and 9,000 this year.
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All things considered, the housebuilding sector is one which is currently fraught with difficulties and the share price performance reflects the changing of the tide.
Over the last year, Persimmon shares have fallen by 40%, as compared to a jump of 7.4% for the wider FTSE100 index, despite a more recent relief rally of 14% over the last three months, which has been largely undone in early trade following these results.
Perhaps more noticeable is the effect on the general view of the shares. After some considerable time of positive consensus, which included Persimmon as one of the preferred plays, the market consensus of the stock has now switched to a 'sell', implying that in terms of the economic cycle, the worst may be yet to come.
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