Underperforming Persimmon at 10-year low and tipped to go lower
28th June 2023 16:00
by Graeme Evans from interactive investor
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Housebuilders are under pressure as investors fear the impact of a mortgage crisis, and one expert thinks this stock is overpriced.
Ten-pound Persimmon (LSE:PSN) shares moved into view today after a City bank cut its target price on fears the builder is at the “sharp end” of the current mortgage squeeze.
Deutsche Bank’s new estimate valuing Persimmon shares at 1,000p represents a level last hit by the FTSE 100-listed stock a decade ago, and compares with over 3,000p in 2021.
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The stock was broadly unchanged today at 1,045p, having slid more than 10% in the past month on worries that short-term mortgage rates above 6% will further hurt demand.
Persimmon is due to update on half-year trading early next month, when April’s guidance for 2023 volumes toward the top end of 8,000 to 9,000 completions will be a major focus.
Deutsche Bank analyst Jon Bell said: “Persimmon's exposure to first time buyers (at one stage around half its private sales) puts it at the sharp end of the current mortgage squeeze.
“With this cohort significantly impacted by higher rates, we expect sales rates to fall, believe full-year volume guidance could come under pressure and consider 2024 consensus pre-tax profits of £425 million as too high.”
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Deutsche Bank sits about 20% below the City’s view for Persimmon’s profits in 2024, reinforcing a “sell” recommendation and prompting today’s cut in price target from 1,212p.
This was reduced from 1,267p in late May, when Bell had “hold” recommendations on Taylor Wimpey (LSE:TW.) and Vistry Group (LSE:VTY) and a “buy” stance on Bellway (LSE:BWY) with a target of 2,727p.
The sector attracted strong interest earlier in the year, when valuations rebounded by more than a fifth on average from October’s lows amid hopes the house market downturn may not be as severe as many feared in the autumn.
However, that optimism has been undone after recent inflation figures fuelled expectations for further interest rate hikes on top of last week’s 0.5% rise to 5% by the Bank of England.
Even during this year’s recovery, Persimmon lagged the rest of the blue-chip building sector after management said they would build 40% fewer homes in 2023, and also scaled back the 235p a share annual dividend through May’s payment of 60p a share.
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The rebased payout has reduced Persimmon’s dividend yield from double digits to 5.8%, a level that compares with current forward yields of 8% for Barratt Developments (LSE:BDEV), 9.1% for Taylor Wimpey and Berkeley Group (LSE:BKG) at 6.6%.
Persimmon shares are down 8% since mid-October, whereas its blue-chip rivals still trade 20% or more higher despite coming under selling pressure in May and June.
In a note published on 7 June, analysts at Liberum said there were still reasons for optimism as the market misses the potential for returns to rebuild.
The City firm said: “Investors should look past the biggest obstacles of inflation and planning. The big picture still sees inflation cooling and a Labour government would be much more pro-housebuilding.
“The sector could see total shareholder returns of 18-22% per annum over the next four to five years as returns rebuild.”
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