Are Persimmon shares safe as houses?

Shares in Persimmon rose 5% on Thursday as it posted upbeat full-year earnings figures and hinted of solid foundations for the coming year. The house builder unveiled a 23% rise in pre-tax profits to £966.8m and an 8% increase in revenues to £3.6bn.

“Persimmon’s performance was strong in 2021 as we delivered more homes, built better and strengthened our platform for future growth,” Dean Finch, group chief executive, told investors.

“Maintaining build rates at pre-Covid levels, we delivered almost 1,000 additional new homes, and improved customer service such that we anticipate receiving a five-star rating in the annual HBF survey later in March 2022, a first in the company’s history, whilst also improving our underlying operating margin.”

Another brick in the wall for Persimmon

Finch says the New Year’s trading has kicked off well, with private sales rates already ahead by 2% in the first-half and a forward sales position of £2.21bn. The house builder expects to build 4-7% more houses this year while maintaining its margins. However, Finch admits that the company is “mindful of the growing risk of an economic impact as a result of the tragic conflict in Ukraine.”

Average selling prices rose by 2.8% in 2021 compared with 2020 and Persimmon saw strong demand. Average private weekly sales were 9% higher than the previous year, which was hit by pent-up demand due to the pandemic – and around 22% higher than 2019.

The housebuilder is also returning 235p per share to shareholders in 2022. The shares currently yield a generous 9%.

Persimmon’s supply chain squeeze

Persimmon said that strong supply chain management and cost controls, as well as its vertical integration set-up, had helped mitigate build cost inflation of 5%. Underlying operating margins grew slightly to 28% compared with 27.6% in 2020.

Cash generation was also strong, at £1.2billion (up from £1.1bn in 2020) before capital returns of £749.6m and net land spend of £447.7m.

The company has acted to pre-empt concerns about the possible cladding defect liability, following the Grenfell Tower tragedy, by setting aside £75m to pay for cladding related or fire safety issues. It has also issued a commitment that no leaseholder residing in homes it developed would have to pay to rectify these defects.

Cost inflation will continue to be a housebuilder bugbear

The shares are down 19% this year to 2,340p on concerns about rising interest rates, inflation and supply chain issues. With inflation already at 30 year highs, Persimmon is likely to have to battle the continued effects of cost price hikes. Management says that currently it expects housing price rises to mitigate input cost increases.

Another fly in the ointment is that the government’s Help to Buy Scheme, which has boosted sales, expires next March. Then, there is also the as-yet unknown economic impact of the war in the Ukraine to contend with.

Nevertheless, for now, the UK housing market remains buoyant due to lack of supply, with house prices rising steadily. Analysts at Berenberg Bank have increased their price target on Persimmon shares from 3,410p to 3,440p, while those at Liberum reiterated their ‘buy’ rating.

The latter point out that the housebuilder is trading on a 60 per cent premium to book value (the value of a firm's assets as entered on its balance sheet). With that in mind, at these levels and with the chunky dividend yield, the shares are a buy.

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