York-based house building giant Persimmon plc said its revenue fell about 30% to £1.19 billion and profit before tax plummeted 65% to £151 million for the six months ended June 30, 2023, as higher mortgage rates continue to roil the housing market.
A recruitment freeze across the group has seen headcount reduced by nearly 300.
Persimmon reported 4,249 new home completions in the first half, down from 6,652 at the same stage of 2022, “reflecting the lower forward order book coming into the year following the market challenges after last Autumn’s ‘mini-Budget’.”
Average selling price of £256,445 was up 4% year on year.
Persimmon’s cash at June 30, 2023, was £357 million, after £192 million in dividend payments and £182 million of land creditors paid in the period.
The firm declared an interim dividend of 20p per share with an intention “to maintain the 2022 dividend of 60p per share, with a view to growing this over time.”
In its outlook, Persimmon said its current forward sales position — including five weeks post period end — was £1.6 billion, 30% lower year on year.
It said forward private sales are £875.9 million, up 83% compared to January 1, 2023, and forward private average selling prices up 0.9%.
Full year completions are expected to be at least 9,000, the top end of the firm’s previously indicated range, with operating profits in line with expectations.
Persimmon shares rose about 3.5% – but the stock is down almost 40% for the past 12 months.
Persimmon CEO Dean Finch said: “Against a backdrop of higher mortgage rates, the removal of Help to Buy and significant market uncertainty, Persimmon has delivered a robust sales rate excluding bulk sales whilst growing the private average selling price in our forward order book and also securing cost savings. We are on track to deliver profit expectations for the year and are building a platform for future growth.
“Our private sales rate has remained broadly consistent throughout the period resulting in a private forward order book that is now 83% higher than it was at the beginning of the year, despite controlled use of sales incentives and limited recourse to investor deals.
“Our pricing overall has remained resilient with continued positive momentum in the forward order book. However, the reduced volumes in the first half of the year has negatively affected our operating margins as we predicted earlier in the year. As we look forward, we expect increasing completions to result in improving operating margins.
“We have been proactive in managing our cost base however, this has been done without losing our focus on quality. We were delighted to retain a five-star customer service rating in the period and have made very pleasing progress in our Trustpilot scores. The group’s national network of outlets providing high quality products at a range of attractive prices and an improved brand reputation are crucial strengths in this market.
“We have maintained targeted investment in exceptional new land opportunities and enhanced key capabilities to deliver high quality homes for customers consistently. Subject to the challenges in the planning system we are determined to grow our outlet numbers in a disciplined way. Our new Space4 factory and investment in TopHat modular manufacturer will help us drive even greater efficiencies in the coming years. We are carefully strengthening our operations and national outlet network to position ourselves for future growth while protecting margins.
“With the historic under-supply of homes the longer term outlook for housing remains positive. Persimmon has a proven track record of delivering strong returns through the cycle. I am confident that the combination of a relentless focus on our key enduring strengths while enhancing key capabilities, will again drive strong returns through the next cycle.”
REACTION:
Richard Hunter, Head of Markets at interactive investor, commented “By any yardstick, these numbers do not make pleasant reading as Persimmon 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.
“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 8000 and 9000 homes.
“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 fallout 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 FTSE100. 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.”
Charlie Huggins, manager of the ‘Quality Shares Portfolio’ at Wealth Club: “Lower home completions combined with elevated build cost inflation have seen Persimmon‘s first half profit fall significantly. New home buyers are clearly exercising greater caution, and frankly who can blame them. This has presented a very challenging backdrop for Persimmon and its peers.
“Mortgage rates have soared over the past year, and have increased further in recent months. When combined with the limited availability of high loan to value mortgages and the end of the Help to Buy scheme in England, it’s no surprise the housing market has seen a marked slowdown.
“Persimmon has responded by battening down the hatches, significantly reducing land approvals and placing restrictions on hiring and new site openings. They are operating in ‘wait and see’ mode, until the outlook for the housing market becomes clearer.
“The outlook for Persimmon is murky at best. House prices have held up better than expected so far, but cracks are starting to appear. And while interest rates should be close to peaking, this offers little succour for first time buyers. Until there is greater clarity on the future path of interest rates it seems unlikely the pressure on the housing market will ease any time soon.”