Persimmon plc (PSN) Ordinary 10p

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Persimmon delivered 1,416 homes in the third quarter, down 1.6% on the prior year.

Average weekly net private sales rates rose 37% to 0.70, with “good customer interest” across all regions. Overall pricing “held firm” in the period, with buyer incentives continuing to run in the 4-5% range.

The order book rose from £1.7bn to £2.0bn, helped by average selling prices in the order book being 5% higher than the prior year.

Demand for Persimmon’s homes has continued into the autumn selling season, helped by improvements in customer sentiment as interest rates have fallen. The group remains on track to complete around 10,500 new homes this year (2023: 9,922), 85% of which have already been exchanged or completed.

The shares fell 4.9% in early trading.

Our view

Persimmon’s third-quarter update was largely as expected, with sales rates improving and full-year guidance remaining on track. But markets got spooked by talk of build cost inflation returning and price negotiations for 2025, hurting the shares on the day.

Persimmon’s houses are typically priced more than 20% below the newbuild national average, which means sales should be more resilient in times of uncertainty. The fact that the order book is growing at pace is an encouraging sign too, and improves visibility over future revenues.

Operating profits were flat back in the first half of the year, somewhat bucking the trend given that many of Persimmon’s peers were seeing double-digit declines. The higher revenues were offset by build cost inflation baked into previous projects and the increased use of incentives to encourage buyers to sign on the dotted line. Most of this weakness looks to have been felt now, so we expect to see profitability start to improve from here.

There are also the in-house materials businesses, which we see as a key differentiator and should help operating margins head back in the right direction. This vertical integration gives quick and cheaper access to key materials. For example, 54% of the bricks used are sourced in-house, giving a £1,800 saving per plot.

While the near-term outlook for Persimmon and the housing market remains uncertain, the significant pent-up demand for homes in the UK remains unchanged. Announcements from the new government, particularly around reforms to the national planning framework, are encouraging for the whole industry. But it’ll likely be a while before the impact of these changes is felt by housebuilders.

With the market expecting interest rates to keep falling well into the new year, affordability pressures look set to ease. Alongside lower build-cost inflation, real wage growth and strong responses to marketing efforts, we see room for growth into 2025.

The balance sheet is in decent shape. Cash flows are improving, and at the last count, there was a healthy amount of net cash on hand to support the current 4.4% forward dividend yield.

With green shoots of a recovery beginning to emerge in the housing market, there’s scope for an improvement in sentiment towards the sector. Persimmon’s valuation remains well below the long-run average, providing an opportunity for potential long-term investors. But it could be a while before activity in the sector ramps back up into full flow, and rising cost inflation has the potential to eat into profits if it isn’t managed carefully.

Environmental, social and governance (ESG) risk

Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.

According to Sustainalytics, Persimmon’s management of ESG risk is strong.

The group collects and discloses scope 1, 2, and 3 emissions and has strong emission reduction plans in place. It has also committed to its homes being net zero carbon in use by 2030. However, there’s currently limited disclosure on what percentage of materials are recycled. Disclosures around product and service safety is also lacking.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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