Persimmon H1 down 8% to £1.7bn amid shortages

Shares of York-based house building giant Persimmon plc fell as much as 5% on Thursday after it published a trading update showing its revenue fell 8% to £1.69 billion in the six months to June 30, 2022, and that it delivered 10% fewer new homes year-on-year.

Persimmon cited further delays in the planning system and material and labour shortages.

Forward sales stood at £1.87 billion, up from £1.82 billion.

“The group delivered 6,652 new homes in the first half of the year (2021: 7,406) which, as guided, was below the first half of 2021, but also slightly lower than we previously expected due to further delays in the planning system and material and labour shortages …” said Persimmon.

“The group’s average selling price increased by 4.0% year on year in the first half to c. £245,600 (2021: £236,199) reflecting strong demand and a reduction in the proportion of homes sold to our housing association partners.

“In the period, 5,553 (83%) of the group’s legal completions were delivered to owner occupiers (2021: 6,104 (82%)) with an average selling price of c. £267,300 (2021: £258,220).

Rising energy prices, supply constraints on certain materials and increased labour costs are driving upward pressure on total build costs.

“Currently, house price inflation is continuing to offset these increases.

“As a result, we expect  to deliver a housing gross margin that is slightly ahead year on year, although, the lower number of completions will result in a slight fall in operating margin reflecting the reduced efficiency of the group’s overhead recovery rates.

“Despite this, we anticipate the group’s profit at the half year to be modestly above our expectations.

As previously announced, the group entered the year with a low number of outlets (c. 290) reflecting its robust volume performance in 2020 and 2021 together with relatively fewer land additions in 2019 and 2020.

“As a result of the group’s high quality land investment, we successfully brought c.65 outlets into construction in the period, however, the planning system remains slow impacted by a Covid-related backlog and increasing complexity.

“For example, across the industry there are c. 120,000 plots in England currently stalled within the system due to Natural England’s nutrient neutrality guidance.

“In the absence of firm guidance from government this uncertainty will continue.

“Persimmon currently has around 1,500 plots affected by this issue which were due for delivery to local communities over the next five years.”

Persimmon CEO Dean Finch said: “I am pleased we have further enhanced our build quality in the period while also driving build efficiency to historical highs and increasing housing gross margin.

“We continued to complement this progress with high quality, disciplined investments in land driving growth in our outlet position. We have delivered this despite the significant on-going challenges being faced by the industry.

“As we rebuild our outlet position, delays in the planning system, disruption in material supply chains and challenges in securing labour have impacted completions in the period.

“We anticipate, however, profit at the half year to be modestly above our expectations reflecting strong demand and positive pricing conditions. Our forward sales position is robust.”

Laura Hoy, Equity Analyst at Hargreaves Lansdown, said: “Persimmon could be the canary in the coal mine for housebuilders, one of the last sectors holding on to post-pandemic euphoria.

“The group said that supply chain snarls were starting to eat into revenues as materials and labour shortages kept the group from delivering as many new homes as it expected.

“Planning holdups thanks to the pandemic were another issue as backlogs have kept some 1,500 sites due to open over the next 5 years in limbo.

“This is a Persimmon-specific problem given the group prefers to buy land without planning at a lower cost to boost profits.

“The good news is that demand showed no signs of slowing, with the average house price continuing to climb and a strong forward sales position.

“That should be enough to prop up profits with management guiding for a slight beat at the half year.

“The market wasn’t overly impressed though, likely reflecting worries that this red-hot demand won’t last forever as the cost of living crisis continues to grow.”  

Richard Hunter, head of markets at Interactive Investor, said: “In different times, the current state of the housebuilding sector would be the cause of some celebration, with Persimmon being one of the more favoured plays.

“The group has a robust balance sheet and cash position, enabling it to continue with shareholder returns comfortably.

“The current eye-watering dividend yield of 12.6% is adequately covered, and is a clear invitation to investors.

“At the same time, Persimmon has upped its game on land acquisition opportunities, having been relatively subdued compared to some of its peers around the time of the pandemic, and has invested £416 million so far this year, with its cash generative abilities providing further scope for expansion.

“Forward sales are at a robust level of £1.87 billion, up by 3% on the previous year, and is 75% forward sold already for the year.

“Rising average selling prices are offsetting the impacts of cost inflation, up by 4% and by 12% on the forward sold properties. Persimmon therefore expects half-year profits to be slightly ahead of expectations.

“For the longer term, the UK still has a housing shortage, mortgage availability remains high and relatively cheap by historical standards and there are no obvious signs from any of the political parties that the housing market is one with which they wish to tamper.

“In the meantime, Persimmon has a substantial strategic land bank which can be deployed at varying speeds, depending on circumstances.

“Despite the unquestionable progress, the sector remains deeply out of favour with a gaping disconnect between actual trading performance and share price performance.

“The end of the stamp duty holiday, the wind down of the Help to Buy programme, supply chain blockages and the cladding issue have all weighed heavily.

“In addition, recent surveys are giving mixed messages on whether house price growth may be slowing and, inevitably, affordability concerns given the escalating cost of living crisis have added to the sector’s woes.

“Persimmon has also noted additional current issues, such as planning system delays, material supply chain issues and labour shortages, all of which are impacting its ability to grow faster.

“Revenues are down by 8% in the year so far, and legal completions have fallen by 10%.

“The company is battling those factors within its control – it has an in-house materials business which mitigates some of the supply chain issues, unlike competitors – but given the backdrop, investors may choose to accentuate the negatives within the statement.

“The shares have fallen by 39% over the last year, as compared to a marginal loss of 0.6% for the wider FTSE100 and now stand 43% down from the level achieved just prior to the pandemic.

“The wider debate of whether the current economic challenges will signal the end of the housing market cycle, or merely a slowdown in rising house prices, will continue to rumble on.

“In the meantime, Persimmon has not lost the support of its followers with a longer term view, as evidenced by the market consensus of the shares remaining at a strong buy.”

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.