Persimmon sails through the headwinds

As is customary, Persimmon (PSN) pulled back the curtain on its key metrics in a trading update at the start of July, making statutory half-year results something of a foregone conclusion.

But an initially indifferent reaction from the market suggests some investors were possibly clinging on for a capital distribution surprise, despite a previous warning that the fast-tracked 110p dividend paid to shareholders on 13 August will be this year’s last. With the next regular payout not due until June 2022, income investors have a while to wait for their next annuity.

On balance, there was little else to darken spirits. Chief executive Dean Finch says he expects “a more normal seasonal trading pattern to reassert itself” in the housing market, at least compared with the significant disruption seen in 2020. Yet stacked against 2019’s “more appropriate comparison”, forward sales are still up 9 per cent in the first 33 weeks of the year.

This, together with a 4.9 per cent year-on-year rise in average new selling prices, explains the surge in revenue, although average national house price inflation is much higher. The group is therefore well placed to service and benefit from rampant demand. For its part, broker Jefferies forecasts a higher proportion of affordable home sales in the second half, and for average price rises of just 0.9 per cent for the full 2021 calendar year.

That could be bad news if rising input costs continue, but on current evidence Persimmon still makes a lot of cash on each house it builds. The new house operating margin may be adrift of 2018’s 31.8 per cent peak, but a rise from 26.6 to 27.6 per cent in the six months to June is still very strong.

"We're managing the balance of inflationary pressures well and currently anticipate that our industry leading returns will remain resilient,” says Finch. On current evidence, the housebuilding sector oligopoly, and Persimmon’s place in it, looks assured.

Analysts at Numis raised their earnings forecasts to 252p and 268p per share for 2021 and 2022, respectively, while cautioning that a reduction in outlets in the period could pare back volume growth, particularly when compared with peers.

But there is no escaping the enormous profitability of this business. Persimmon’s underlying return on capital is now just above the three-year average at 37.9 per cent, while the post-tax return on equity – a more meaningful yardstick for shareholders’ equity and dividends – is now 22.6 per cent.

An 8 per cent prospective yield and plenty of cash on hand should provide comfort, along with a solid land holdings replacement rate, and volume growth of around 10 per cent. Long-term buy.

Last IC View: Hold, 2,804p, 3 Mar 2021