Persimmon is at the mercy of an unpredictable market

Taken in isolation, Persimmon’s (PSN) results for the six-month period to 30 June make the stock look appealing. Pre-tax profit is a healthy percentage of turnover, the dividend yield is high and with such strong figures the low price to earnings ratio and discount to net asset value suggest Persimmon is undervalued.

However, scratch beneath the surface and some issues emerge. The first is that the company is doing worse now than it was at the same point last year by a lot of metrics. Housing completions, revenue and net cash are all down, revealing how rising construction costs are impacting the company. Persimmon said in its update that the increase in house prices and the corresponding increase in the sales price of its homes has helped to mitigate these inflationary pressures, but therein lies the rub. If house prices don’t continue to rise, what does that mean for the company’s profit margin?

Things would have to get pretty bad for Persimmon to swing to a loss, but a drop in prices – even one as small as the 1 per cent fall Savills is predicting for 2023 – would likely hurt the business. Persimmons' cash pile, while less than last year, remains a healthy buffer for the company and it would perhaps be wise to invest this money back into the business now. Not so much fixing the roof while the sun is shining but before the cloudy weather begins to look ever more ominous.

The other thing which always deserves a mention with Persimmon is the government, which has mentioned the housebuilder by name a few times over the years and rarely in a flattering light. This year, it has had many conversations with the housing department about fire safety and how much it should pay towards fixing this problem post-Grenfell, but shareholders with a longer memory will recall that last year it was also under investigation by the government’s competition watchdog over alleged mis-selling of leasehold homes – a probe which the watchdog closed after Persimmon agreed to make changes to its policies.

Although the leasehold fracas is a thing of the past, fire safety is likely to remain an ongoing issue for housebuilders, their customers and the government for years to come. The saga is a reminder that, as with house prices and the leasehold controversy, there is often a lot happening in the housing market which Persimmon has little control over. Hold.

Last IC View: Hold, 2,431p, 3 Mar 2022