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Persimmon reports fall but future looks good for housebuilder

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If you are a first-time house-buyer, you’ll have been dumbfounded at the rate that house prices have been rising this last year, leaving you like a modern-day Tantalus with what you desire just out of reach. In parts of the South East this summer, some houses were going up some GBP10,000 a week.

According to the Office for National Statistics the average house price at the end of May was GBP283,000 which has gone up more than 13% year-on-year, but this is just a snapshot, as some regions have experienced much higher growth. By contrast the average annual wage was GBP24,600, making the average house 11 ½ times the average salary. With mortgage lenders offering 4x to 4.5x salary, there seems to be a dichotomy in the UK housing market. With rising interest rates, first-time buyers might soon be experiencing the burden of Sisyphus, to go with the curse of Tantalus.

So how does this affect Persimmon [LSE:PSN], the UK housebuilder? The FTSE-100 listed, York-based construction company released its 1H22 results today (17th August). The group generated revenue of GBP1.69bn, compared to 1H21 revenues of GBP1.84bn. Pre-tax profits fell to GBP439.7m from GBP480.1m the year previous and the housebuilder completed 6,652 homes in the first half of the year, compared to 7,406 for the same period in 2021. Cash on balance was also down from GBP1.32bn in 1H21 to GBP0.78bn in 1H22.

However, the average selling price per home was up to GBP245,597, compared with GBP236,199 in 1H21, an increase of 4% and Persimmon increased its land bank across the year from 85,771 plots in 2021 to 89,052 plots at the end of 1H22. The group continues to target around 10% growth in outlets and 14,500 to 15,000 completions for the full year. Demand is still said to be strong with a robust forward order book of GBP2.32bn

“Persimmon continues to perform well. We are making important progress in quality, service, land investment opportunities and efficiencies to build an even stronger business, while continuing to deliver the strong financial returns that Persimmon is renowned for. Demand for our attractively priced, high-quality homes has remained robust, with our average private sales rates for the period being c.1% ahead year on year,” Dean Finch, Persimmon’s chief executive said in a statement this morning.

The market did not react too favourably, with Persimmon’s share price falling from 1,849p at close of play on 16th August to 1,809p when the market opened today. The company has offered a year-to-date return of -36.5% and a one-year return of -37.5% with a market capitalisation of GBP5.9bn. Share prices have ranged from 1,717.50p to 2,974.00p over 52-weeks.

“Increasing house prices in recent years mean home buyers are having to borrow more to get on the housing ladder. Combine that with rising interest rates, which ultimately mean more expensive mortgages, and the affordability of property could fall substantially. If interest rates keep rising, it’s hard to see how the housing market would be immune,” said Charlie Huggins, head of equities at Wealth Club.

“For now, Persimmon is a cash machine. But with build costs rising, they need house prices to continue going up, or else margins will come under pressure,” said Huggins.

Rising build costs

With inflation running at 8% to 10%, Finch did warn that the rising cost of materials, labour and energy were driving up build costs. So far, he said, these increased costs have been passed on to buyers, but this could be tough to maintain if average house prices fall.  Despite these challenges, the trading update indicated that half-year profits are expected to be modestly above expectations, said Finch.

“Higher prices continue to offset an 8-10% rise in build costs, as Persimmon sees robust demand and low levels of cancellations. Revenue and profits have fallen, but that was expected given lower completions this year as strong demand over the last couple of years and a slowdown in spending in 2019/20 meant active outlets were lower than they could have been,” said Matt Britzman, equity analyst for Hargreaves Lansdown.

Persimmon has courted controversy over the last few years. Criticism about the company’s poor build quality linger. Infamously in 2021, the housebuilder built a block of properties, the Cowdray Centre, the wrong way round in Colchester. The local authority required them to ensure the building was completed to the original designs submitted. The company also has attracted criticism about the amount of truly affordable ‘affordable’ homes it builds as part of every new development, at a time when even the most affordable home is unobtainable to most people on average means in the UK.

By contrast the company has attracted heat as to how generous it is to own executives. In December 2017, Persimmon’s chairman, Nicholas Wrigley, resigned over his role in awarding Jeff Fairburn, the CEO, a GBP128m bonus. The Persimmon bonus scheme was believed to be the UK’s ‘most generous ever’, scheduled to pay more than GBP800m to 150 senior staff from 31 December 2016. The following year Fairburn crossed swords with a journalist over his bonus payment, the largest in UK corporate history. Although pledging to give half of his bonus to charity, three years later there was no sign of his philanthropy. Fairburn left company at Persimmon’s request at the end of 2018 to become CEO of Persimmon competitor, Berkeley DeVeer in 2020.

Temporary headwinds

The current boss, however, remains optimistic about Persimmon’s future. Despite the share price languishing, Finch claimed the current economic climate is temporary and longer-term the solid fundamentals of the UK housing market, where population growth and a shortage of housing stock fuel demand and will push up prices, will put Persimmon in a good place for the next few years.

Analysts are generally positive on Persimmon. In a recent Financial Times survey, out of 18 analysts polled for the FT, six rated the shares a ‘Buy’, seven believed they would ‘Outperform’, four considered them a ‘Hold’, while only one said they would ‘Underperform’. Out of 14 analysts offering 12-month price targets, the median was 2,564.50p, representing a 38.7% increase on the closing price on 16th August.

However, Huggins warned: “Persimmon is performing strongly in areas it directly controls. It has one of the best land banks in the industry and has taken steps to improve the quality of its homes and customer service. But, make no mistake – the biggest reason for Persimmon’s success is high house prices, and the general strength of the housing market. That is something over which it has no control, and it could be about to change.”

Persimmon needs house prices to keep going up, but if past performance is any measure of the future, house prices will continue to increase – regardless of interest rates, Covid-19 or Brexit and the plight of first-time buyers. Demand will continue to outstrip supply; and although the next 12-months might be a bit rocky, longer-term Persimmon could be building a brighter future.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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