ii view: housebuilder Persimmon builds profit hopes

Full-year trading update to 31 December

• Home completions up 7% to 10,664
• Average selling price up 5% to around £268,500
• Forward orders up 8% to £1.15 billion
• Net cash held of £260 million, down from £420 million a year ago

Guidance:

• Expects full-year 2024 underlying pre-tax profit to be around the upper end of analyst forecasts of £349-390 million 
• Targeting 300 outlets over the medium term, up from a current 270

Chief executive Dean Finch said:

“Persimmon has worked hard and is well positioned for the future, supported by the land and planning investment we have made in recent years, our vertical integration capabilities and our excellent teams. 

“This investment, coupled with the government's ambitious planning reforms which demand more of the high-quality, affordable homes which are Persimmon's core strength, supports our growth ambitions in the medium-term.”

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ii round-up:

Persimmon (LSE:PSN) today detailed 2024 home completions that beat City forecasts, with the housebuilder now expecting annual profit at the upper end of analyst estimates. 

Home completions for 2024 rose 7% to 10,664, surpassing expectations by 1% and fuelled by an 18% jump in private homes alongside a 29% retreat in affordable partnership homes of 1,589 builds. The average selling price rose 5% to £268,500. 

Shares in the FTSE 100 company rose 6% in UK trading having come into this latest news down by around a quarter over the last year. That’s like rivals Barratt Redrow (LSE:BTRW), Taylor Wimpey (LSE:TW.) and Berkeley Group Holdings (The) (LSE:BKG) and in contrast to an 8% gain for the FTSE 100 index over that time. 

Persimmon operates 29 UK regional offices, selling homes under the brand names Charles Church, Westbury Partnerships and Persimmon itself.

A profit margin similar to 2023 and higher-than-forecast build completions should see underlying full-year pre-tax profit at the upper end of City forecasts of £349-390 million. That’s potentially up from £352 million in 2023. 

Net private sales per outlet per week improved by 21% over the year to 0.70, with demand consistently higher than 2023 since the spring. Forward sales of £1.15 billion as of late December climbed from £1.06 billion a year ago.

Spending on building safety remediation of around £60 million and the return of £192 million via share buybacks helped leave the group’s net cash position down £160 million year-over-year to £260 million. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the news. Full-year results are due 11 March. 

ii view:

Started in 1972, Persimmon today employs over 4,500 people. Headquartered in York, it builds homes from Cornwall to Wales and Scotland, with the builder also operating three manufacturing plants making timber frames, bricks and tiles.  

For investors, rising costs given increased employer national insurance contributions and tighter building regulations may squeeze profit margins in 2025. Customer affordability constraints persist, with mortgage rates above previous lows and profit reducing buyer incentives still required. A forecast one-year price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap, while elevated UK government borrowing likely reduces opportunities for industry assistance such as the previous ‘help-to-buy’ scheme. There are also concerns about supply of quality trades people. 

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On the upside, the relatively new UK government has highlighted plans to ease planning constraints, potentially increasing build completions in future. Hopes for reduced mortgage rates are likely aiding customer demand. The group’s own making of building materials should help it deal with any broader increases in material prices, while sector consolidation, such as that forming Barratt Redrow, could continue.   

Persimmon shares have had a difficult three months and there are clearly risks investing in housebuilders currently, given concerns about the state of the UK economy and outlook for interest rates and inflation. However, while some investors might wish to see how the situation develops, others may decide to take advantage of the lower share price and lock in a dividend yield of 5.5%.

Positives

• Robust selling prices
• Potentially eased planning regulations 

Negatives

• Uncertain economic outlook
• Reduced net cash held

The average rating of stock market analysts:

Buy