This is a strong performance from Persimmon (LON:) as the group continues to pull the levers under its control, and always with one eye on the future.
However, it is the exogenous factors which are weighing on the sector, not least of which is the current conflict between the US and Iran. A burgeoning oil price has led to inflationary concerns, which in turn have reversed the consensus on monetary policy. Whereas one or even two interest rate cuts had been priced in for this year, the current estimate is that there could actually be one rise, which would impact mortgage affordability.
This adds to the challenges which have, of course, been many and varied in this most cyclical of sectors. Uncertainty leading up to the November Budget, mortgage availability and affordability concerns, slowing construction activity and pressures arising from increases to the likes of National Insurance and stamp duty are meaningful headwinds.
That being said, there are a number of tailwinds which could yet revitalise the sector. More broadly, there remains a noticeable supply shortage of homes domestically and government reforms to planning should oil the wheels of being able to break ground. At the same time, the group noted that for some, inflation-beating pay rises and the relaxation of lending rules led to higher enquiry rates and has underpinned growth alongside wider mortgage availability.
In the meantime and for its part, Persimmon is opening its strategic doors where possible. Over the year, the group had a net spend on land of £541 million, compared to £437 million the previous year, adding to one of the core parts of the investment case for the housebuilder, namely its land bank, which rose by 3% to now stand at 84879 plots. This in turn reduced net cash from £258.6 million to £117 million, although the rationale for the spend is clear given this point in the economic cycle. By the same token, the dividend remains unchanged, although a yield of 4.9% effectively pays investors to wait.
In addition, the group operates three manufacturing facilities to make its own timber frames, bricks and tiles. It estimates that this saves around £6000 per plot on building costs, and indeed there is now demand coming from elsewhere for its bricks in particular. At the same time, the group has launched its “New Build Boost” scheme in an effort to ease some of the affordability concerns of potential buyers.
These combined factors have given a boost to the numbers across the board. Revenues rose by 17% to £3.75 billion against an expected £3.64 billion and underlying pre-tax profit by 13% to £445.6 million, above estimates of £428 million. Total forward sales grew by 6% to £1.8 billion, underpinned by a 9% spike in private forward sales to £1.25 billion, which increases visibility for future earnings. Home completions of 11905 represented a 12% increase, while underlying operating margin and Return on Capital Employed also moved higher.
For the moment and given wider geopolitical concerns, Persimmon is maintaining its guidance for the coming year, with housing completions in a range between 12000 and 12500 and underlying pre-tax profit of £470 million.
Even so, the group has highlighted a strong start to the new year amid generally supportive conditions and recovering sentiment after the Budget uncertainty, and the Spring season has begun with a 9% increase in net private sales per outlet per week over the first nine weeks.
Of late, the faltering broader market and the prospect of higher inflation had reduced the shares to a gain of just 4% over the last year, as compared to a hike of 19% for the wider , and the shares remain 60% shy of their level five years ago. However, the opening reaction to the update has seen the strong benefit of a double whammy, with a boost for the sector and the primary index. For many investors a sustained recovery for the group is a matter of when and not if, and alongside an undemanding valuation, Persimmon remains the preferred play in the sector with the market consensus coming in at a strong buy.