Persimmon LSE:PSN, the FTSE-100 listed UK housebuilder, published a trading statement this morning (12th January), that covered the period from 7th November to the end of 2022.
The company was not afraid to highlight the problems that it as a company was experiencing and the UK economy as a whole was undergoing. Citing higher mortgage rates, inflation, heightened market uncertainty, falling consumer confidence and the end of the Help to Buy scheme in England to interpret a fall in weekly sales rates and a lower forward sales position that started to bite in 4Q22 and has spilled over into the New Year.
As previously reported Persimmon had a good first half of 2022, but as the year progressed, the York-based housebuilder started to experience more difficult trading conditions, with its sales dented by the fall-out of the Truss mini-budget in September 2022, that saw mortgage rates rise significantly for home-buyers.
House price fall
The announcement by the Bank of England that the UK was to enter a sustained recession soon after, started to see the average house price in the UK start to decline from a record high of GBP296,000 in October.
On a year-to-year basis Persimmon improved many of its metrics. New home completions were up 2% to 14,868 compared to the same period in 2021. And average selling price increased 5% year-on-year to GBP248,600.
The sales figure was towards the top of the builder’s guidance and the company said in a statement that its build programme was up 15% compared to 2H21, delivering 8,200 homes in 2H22, tracking 8% ahead of 2021’s build rate. The firm benefitted from house price inflation in 2022, which allowed it to offset its cost inflation during the second half of the year.
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However – and it’s a big however – as the year advanced, Persimmon noted that consumer confidence was beginning to drain out of the market, as increased mortgage rates, consumer inflation and cost-of-living concerns, and falling house sale rates across the market started to come into play.
Declining sales
On a year-to-year basis Persimmon’s current forward sales position declined by 36% to GBP1bn, with private forward sales falling even sharper by 56% to GBP0.5bn The company started to fall back on cash reserves with cash-in-hand falling to GBP0.86bn, down from GBP1.25bn as at 31st December 2021. The worsening financial climate was reflected in private net sales per outlet falling to 0.19 for the last seven weeks in the year compared to 0.61 in 2021.
Regional disparities in house prices affected the builder’s sales, with a fall in Southern England – where house prices are much higher than the rest of the country – as the government withdrew its Help to Buy scheme and buyers – especially those in the first-time buyer category – were increasingly unable to afford to buy in this region.
Affordability concerns
The company published a gloomy outlook for 2023, citing affordability, again primarily in that first-time buyer segment, due to higher mortgage costs following the BoE raising interest rates as pricing potential buyers out of the market. The company has tried to address this by offering new customers ten months’ mortgage-free offers, which, said the company in a statement this morning, had stimulated interest in the first trading week of 2023.
As to whether ‘interest’ will convert into sales, it is too early to say and Persimmon said that its was not in a position to comment on when demand would recover, or when the recession would start to peter out.
The company opened trading today at 1,302p and had risen to 1,394p within the first two hours of trading before settling about 20p lower as the morning traded wound down. The company has offered a -13.2% year-to-date return, with a -48.6% one-year return. Its shares have ranged between 1,113.5p and 2,716p over a 52-week period and the company has a market capitalisation of GBP4.1bn.
Persimmon is a barometer of the health of the UK economy, given how house prices are so important, bordering on a national obsession. There is no surprise in the slightly deflated trading numbers released today, given the turmoil in UK society and the economy in 2022 and this is reflected in the share price. There were no big surprises, and presumably the market knew what was coming down the line.
Longer-term confidence
On a microscopic-view, a reduction in sales; a cautious forecast; and an erosion of Persimmon’s cash reserves doesn’t look great on a short-term basis. But from a bird’s eye perspective, Persimmon will likely continue trading at the same level this year as in 2022. It has a significant land bank, and although it might slow down new developments on this until a market upturn, the price of land should become more attractive creating better buying opportunities on more desirable plots. With a reasonable cash reserve and having the kind of access to credit and liquidity a FTSE100 company enjoys, the company can be selective on purchases and comfortably tick-over until the market eventually recovers.
Longer-term the demand for new houses will remain strong, and there is little fear of one of the big beasts of the sector experiencing any exceptional or extraordinary crisis. Although capital growth might be subdued, this will be no more or no less than the wider market and dividend income should remain robust.
Deshe Analytics – in line with most of the market – consider Persimmon a ‘Hold’. The analyst said: “…Persimmon Plc is performing reasonably well and on par with its peers. Its income, value, and income factors all individually appear positive and give support for optimism regarding the likelihood of continued positive performance. Therefore, they earned a total score of 62 out of 100 and a ‘Hold’ recommendation.”
Final annual results are expected on 1st March 2023.