Persimmon keeps swimming against a harsh tide

By any yardstick, these numbers do not make pleasant reading as Persimmon (LSE:PSN) continues to swim against a particularly harsh tide.

The litany of headwinds shows no signs of abating, as the sector faces the combined challenges of lower mortgage availability and affordability, stubborn build cost inflation, interest rate hikes, which have almost certainly yet to peak, and inevitably less buying interest. Margins have also suffered given the effects of lower volumes, increased marketing costs and build costs which has not been enough to offset a modest increase in average selling prices.

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As such, the key metrics are on a downward spiral which has had a material impact on performance. A sales rate of 0.59 has dropped from a previous 0.91, new home completions declined by 36%, while underlying gross margin has fallen from 31% to 21.5% and underlying operating margin from 27% to 14%. Revenues are slightly ahead of estimates at £1.19 billion, although this figure is 30% lower than the year previous. The toxic cocktail has resulted in a pre-tax profit of £151 million, lower than consensus estimates and 66% down on last year.

The removal of the Help to Buy scheme has had a particular impact on first-time buyers, an area to which Persimmon has had a traditionally higher exposure. The general bureaucracy of the planning process is another headwind, while the lower sales rate and indeed forward order book imply that the current raft of pressures are likely to persist for some time to come.

Set against this parlous backdrop, Persimmon has been working hard to assert some influence on the factors within its control. The introduction of incentives and a part-exchange scheme have shown some signs of mitigating the wider malaise, while the group continues to acquire new land opportunities on what it describes as an exceptional basis. While still 30% behind last year, the forward order book of £1.6 billion is some 49% higher than at the start of the year, and in terms of outlook, the group is guiding towards the top end of its previous estimates for full-year completions of between 8,000 and 9,000 homes.

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At the same time, its ability to manage costs through its ownership of brick, tile and timber frame factories sets it aside from its competitors, guaranteeing a cost-effective and resilient supply of building materials. Build cost inflation nonetheless remains at a stubborn 5%, although this represents an improvement from the previous levels of 9% to 10% and is expected to fall further.

The group also retains net cash of £360 million and excess extra liquidity if required, representing a robust picture which also leaves the door open for further selective land acquisitions. The payment of an interim dividend after the final dividend was previously slashed by 75% restores a projected yield of 7%, which is of some solace to its shareholders.

Persimmon has kept its full-year guidance, with profits likely to be in line with expectations. The true fall-out from a potentially weakening UK economy remains to be seen over the remainder of the year and it is also unclear as to how much of the bad news hitherto has been priced in. Its shares have declined by 38% over the last year, as compared to a rise of 1% for the wider FTSE 100. The release may assuage some of the fears that trading could have been even weaker, with the shares showing a moderate rise at the open and also that, longer term, the historic under-supply of UK homes will remain in place. However, for the moment the market consensus of the shares as a hold reflects a split of investors not yet willing to commit to the possibility that the worst may be over.