Persimmon LON:PSN, like its peers, has seen a slight pickup in sales since the start of the year. But overall, the outlook for the year ahead remains downbeat.
New home buyers are clearly exercising greater caution, and frankly who can blame them? Mortgage payments for first time buyers have significantly increased over the past year. When combined with the limited availability of high loan to value mortgages and the end of the Help to Buy scheme in England, it’s no surprise that the housing market has seen a marked slowdown.
Significant margin pressures
“Persimmon has earned juicy profit margins on the back of housing market strength over recent years,” observed Charlie Huggins, head of equities at the Wealth Club. “But this year it is facing significant margin pressures. Cost inflation still remains a problem, while the group warns that the number of home completions could fall to around 8,500 this year, down from c. 15,000 in 2022.”
Add this to extra sales and marketing costs needed to shift homes in a weaker environment and the group’s margins could easily halve this year, depending on how the rest of the year plays out.
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“Persimmon’s continuing to feel the effects of a shaky housing market,” said Aarin Chiekre, equity analyst at Hargreaves Lansdown. “While revenues increased this year thanks to higher house prices and a greater number of completions, the outlook’s not so rosy next year. If current sales rates persist for the rest 2023, full-year completions are expected to fall by more than 40%, which would take a huge bite out of revenues.”
And Chiekre says that while underlying operating profits rose to £1bn, investors should bear in mind that figure adds back a huge £275m adjustment related to expected costs for removing combustible cladding.
Persimmon facing short term head winds
The longer-term fundamentals of the UK housing market remain strong, but short-term headwinds are creating lots of waves for Persimmon. On one side, higher mortgage rates and a cost-of-living crisis are already stretching consumers’ incomes thin. On the other, significant build cost inflation is squeezing Persimmon’s margins. Recession fears aren’t going to abate anytime soon, so efforts to conserve cash now are a wise move, but the market hasn’t liked a 75% cut in the dividend.
Persimmon key metrics to watch
- PE ratio: 6.3
- EBITDA Margin: 26.96%
- Price to book: 1.2
- ROE ratio: 20.5 (-3%)
- Bridgewise AI Rating: Hold
There are reasons for optimism. Despite rising interest rates, mortgage rates have fallen in recent months due to intense competition between lenders. And despite the rising cost of living, consumer spending has held up better than many experts expected, underpinned by record low unemployment.
This explains why Persimmon’s share price has recovered recently. However, in order to build on this recovery, investors will likely need clarity on the path of interest rates and the impact on house prices.
