ii view: housebuilder Persimmon issues warning on rising costs

Third-quarter trading update from 1 July

• Net private sales rate per outlet of 0.70, up from 0.51 in Q3 2023
• Forward order book up 17% to £2.02 billion
• Average selling price of £291,400, up from £278,500 in Q3 2023

Guidance:

• Continues to expect full-year home completions of around 10,500, up from 9,922 in 2023
• Expects year-end cash balance of between £100 million to £200 million

Chief executive Dean Finch said:

"Positive momentum in the business continued over the summer months and we remain on track to deliver growth in completions to 10,500 for the full year. 

“We continue to position the business for success, maintaining our focus on quality and customer service, and converting our land holdings into active developments."  

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ii round-up:

Housebuilder Persimmon (LSE:PSN) today detailed rising customer demand and robust selling prices but also flagged potentially rising costs in 2025.

Expected build completions for the full year 2024 were maintained at 10,500 homes, up from 9,923 last year, with a net private sales rate per site per week of 0.70, up from 0.51 a year ago. However, signs of build cost inflation had begun to emerge in price negotiations for 2025, with national insurance changes made in the recent Budget and new building regulations also expected to have an impact.  

Shares in the FTSE 100 company fell 5% in UK trading having come into this latest news up by a similar amount year-to-date. Barratt Redrow (LSE:BTRW) is down 20% in 2024, while the FTSE 100 index is up 5%.

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

Forward sales for the York headquartered builder rose 17% from a year ago to £2.02 billion. An average selling price of £291,400 was up from £278,500, with required sales incentives continuing at around 4% to 5%.

Spend on new land rose to £123 million during the period, an increase from £78 million in Q3 2023. Persimmon’s year-end net cash position is expected by management to be £100-200 million, down from £423 million at the 2023 year-end. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the news. The housebuilder’s next update is scheduled for 14 January. 

ii view:

Founded in 1972, Persimmon is today the UK’s fourth-largest housebuilder by stock market value, behind rivals Barratt Redrow, Taylor Wimpey (LSE:TW.), and Berkeley Group Holdings (The) (LSE:BKG). Employing over 4,500 people, Persimmon generally has more expose to lower-priced affordable sales and in particular first-time buyers. Geographically, outlets range from Cornwall to Wales and Scotland, with Persimmon 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 next year. Customer affordability constraints persist, with mortgage rates above previous lows and buyer incentives still required to sell homes. Elevated UK government borrowing likely reduces opportunity for industry assistance such as the previous ‘help-to-buy’ scheme, while a forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap.  

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To the upside, continued hopes that mortgage rates will reduce further look to be underpinning increased customer enquiries and sales rates. The relatively new UK government has highlighted plans to ease planning constraints. Persimmon’s own building materials production arm should help it deal with any broader increases in material prices, while consolidation already seen across the housebuilding sector could continue.   

In all, and despite ongoing risks, a forecast dividend yield of around 4% is likely to keep at least income oriented investors interested. 

Positives

• Robust selling prices
• Mortgage rates may go lower

Negatives

• Uncertain economic outlook
• Reduced net cash held

The average rating of stock market analysts:

Strong hold