Persimmon unlikely to beat the competition

Investing in Persimmon (PSN) requires a lot of faith. As expected, the FTSE 100 housebuilder’s profits and revenues tanked in its results for the six months to 30 June due to higher interest rates and the end of Help to Buy. Persimmon hopes to return to growth as market conditions improve, but other housebuilders with larger land banks and more cash will likely overtake it when the recovery comes.

Persimmon aims to build “at least” 9,000 homes for the 2023 calendar year and currently has planning permission on 35,086 plots, equating to three-and-a-half to four years of supply at the current build rate. It also complains that an “increasingly lengthy and complex planning system” restrains its number of consented plots. Similarly sized FTSE 100 rivals Barratt Developments (BDEV) and Taylor Wimpey (TW.) are targeting over 13,000 and 10,000 completions, respectively, and have 47,641 plots with planning consent and 83,000 plots in a “short term landbank”, respectively.

Both could outperform Persimmon in the coming years, but are priced lower as a proportion of their most recently declared earnings and at a discount to their net asset value (NAV). Meanwhile, Persimmon trades at a premium to its NAV, which we do not consider justifiable considering its potential underperformance compared with peers.

Persimmon is also worryingly mute about the end of Help to Buy. It says this has hit sales, particularly to first-time buyers, but it does not explain how it will replace those lost sales. Earlier this year, many FTSE 350 housebuilders touted the Deposit Unlock initiative, allowing buyers to purchase new builds with a 5 per cent deposit, as an industry-driven replacement to Help to Buy, but there are no references to the idea in Persimmon’s results.

Still, the equity market found some good news in the results, marking the shares up 3 per cent on the day. The reintroduction of its half-year dividend shows that the housebuilder is bullish about the future, with forward sales up 83 per cent versus the start of the year. The same week analysts slashed forecasts for Bellway (BWY) for the 2024 calendar year makes it look better placed by comparison. 

However, on balance, we see no reason to upgrade our rating considering Persimmon’s current problems and the prospects of its cheaper competitors. Sell.

Last IC View: Sell, 1,319p, 1 Mar 2023