Persimmon profits fall, but outlook remains optimistic

An eye-watering dividend yield of 12.7% at the FTSE 100 firm has mitigated some of the pain of a poor share price performance, says our head of markets.

The housebuilding sector is deeply out of favour with investors at the moment, even though its constituents continue to make hay while the sun shines, and Persimmon (LSE:PSN) is no exception.

As trailed in last month’s trading statement, new home completions for the period dropped by 10% year-on-year, with the full-year outturn being revised down to between 14,000 and 15,000 new home completions, partly due to factors outside the group’s control. Against strong comparatives as some of last year’s pent-up demand was unleashed, both revenues and pre-tax profit have fallen by 8%. The start of the second half has seen private sales decline by 11% compared to the previous period, although importantly these numbers are 8% higher compared to pre-pandemic levels.

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Persimmon’s previous decision to bring some of the building production in-house is looking like an increasingly smart move in insulating the group from inflationary and supply chain issues. It has expanded capacity at its brick, tile and timber frame factories, which has contributed to the group being able to maintain its new housing gross margin at an impressive 31%. Average selling prices have also risen to £245,600 from £236,200, which has further cushioned the blow of general cost inflation.

The group’s outlook recognises the wider economic challenges ahead, and in particular is keen to resolve an increasing bottleneck in new production caused by planning delays. The group has planning consent for around 90% of its volume delivery for next year, and 75% with detailed planning permission. Should this blockage be removed entirely, the potential for a further boost to revenues and profits can begin to fully wash through.

In the meantime, the concerns which have plagued the sector as a whole continue to depress share prices, although not trading performances. Today’s UK inflation print marks another unfortunate milestone which will add to concerns for the sector, with the possibility of further interest rate rises posing questions on general affordability. At the same time, the cladding issues which have also become an expensive sideshow to the industry are still present, while the removal of the Stamp Duty holiday and a revamped Help to Buy scheme have also weighed. Recent house price surveys have suggested a partial slowdown in prices, although this has clearly yet to filter through to the current experience of the housebuilders.

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Persimmon’s financial position also remains healthy, giving the scope for further land acquisition opportunities. Even after having spent £416 million so far this year on such opportunities and a further £400 million on shareholder returns, the company retains net cash of £780 million. Indeed, shareholders have seen significant returns in terms of an eye-watering dividend yield of 12.7%, which has mitigated some of the pain of a poor share price performance. The dividend remains adequately covered and, on present numbers, looks perfectly sustainable.

The current situation is one which builds on previous investments and there is more to come. Forward sales stand at £2.32 billion, an increase of 4% over the previous year, and for this year the plots are 90% forward sold. As Persimmon continues to work on its volume delivery, particularly regarding the planning challenges, it expects a significantly higher return for the remainder of the year.

The company is set fair and is aiming to maintain its tradition of growth, profitability and generous shareholder returns. Where the company can move the dial is on those factors within its control, an example of which has been the resilient gross margin. Wider industry concerns have hampered the sector, and the 36% decline in Persimmon’s share price over the last year is in stark contrast to the wider FTSE 100, which has posted a gain of 5%. Even so, with such pressure in evidence, the shares inevitably look increasingly cheap on a historical basis and the market consensus of the shares as a buy reflects the apparent disparity.