Persimmon – Margins Coming Under Pressure

Persimmon, one of the UK’s largest housebuilders, has released its final results to 31 December 2022:

  • Underlying operating profit up 4% year on year to over £1bn
  • Forward sales position reflects the significant drop in private sales rates experienced in Q4 2022 to 0.30 (Q4 2021: 0.77), although the group states that cancellation rates have reverted back to typical historic levels
  • The group warns that cost inflation of c.8% along with lower completions and increased sales and marketing costs will have a significant impact on profit margins this year

Charlie Huggins, Head of Equities at Wealth Club, commented:

“Persimmon, like its peers, has seen a slight pickup in sales since the start of the year. But overall, the outlook for the year ahead remains downbeat.

New home buyers are clearly exercising greater caution, and frankly who can blame them. Mortgage payments for first time buyers have significantly increased over the past year. 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 that the housing market has seen a marked slowdown.

Persimmon has earned juicy profit margins on the back of housing market strength over recent years. But this year it is facing significant margin pressures. Cost inflation still remains a problem, while the group warns that the number of home completions could fall to around 8,500 this year, down from c. 15,000 in 2022. Add this to extra sales and marketing costs needed to shift homes in a weaker environment and the group’s margins could easily halve this year, depending on how the rest of the year plays out.

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.

There are reasons for optimism. Despite rising interest rates, mortgage rates have fallen in recent months due to intense competition between lenders. And despite the rising cost of living, consumer spending has held up better than many experts expected, underpinned by record low unemployment.

This explains why Persimmon’s share price has recovered recently. However, in order to build on this recovery, investors will likely need clarity on the path of interest rates and the impact on house prices.”

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