Persimmon shares crack in face of profit warning, dividend cut and fall in expected completions

• Persimmon becomes latest firm to cut dividend when forecasts implied a dividend yield of more than 10%
• Builder warns of risk of sharp drop in profit margins in 2023
• Net cash balance sheet and lowly valuation relative to assets may explain why shares are not downy by even more

“The bigger they are, the harder they fall and Persimmon’s trading alert for 2023, the forecast of a potential big drop in its sector-leading profit margins and cut in its dividend explain the share price tumble after its full-year results for 2022,” says AJ Bell Investment Director Russ Mould. “One possible conclusion to be drawn from management’s revised outlook is that 2023’s operating profits and operating margins would be the lowest from Persimmon since 2012. It would (almost) be as if Help to Buy had never happened, and could raise the question of who was really helped the most by the scheme launched a decade ago by then Chancellor of the Exchequer, George Osborne.

Source: Company accounts, management guidance given for 2023 alongside 2022 results.

“Persimmon still got almost a quarter of its completions from Help to Buy in 2022, just as the much-extended programme finally came to a close, and detractors will persist in asserting that the scheme boosted demand and not supply, with the inevitable result that prices soared. House price inflation has outstripped wage growth ever since and, when you throw in higher interest rates and mortgage costs to an already troubling affordability issue, the UK housing market may be teetering on the brink of a nasty downturn.

Source: Company accounts. Persimmon’s annual report, full-year results presentation and full-year press release did not include a figure for 2021.

“For all of that, Persimmon’s 2022 results featured no real nasty surprises, as gloomy outlook statements from the York-based firm and its peers in the autumn had set the tone (and the bar of expectations). Completions rose by 2% and average selling prices by 5%, while operating profit came in, as expected, broadly flat at £1 billion and the balance sheet continued to harbour plenty of net cash.

“However, the real shock came with the outlook statement for 2023. Persimmon warned that completions could drop by more than 40% to around 8,500 (at the mid-point of management’s guided range) if sales rates per outlet did not pick up from levels seen during the early stages of the new financial year. That would take volume completions back to, or even below, the levels seen in 2009 at the tail-end of the recession that followed the Great Financial Crisis.

Source: Company accounts. 2023 completions are based upon the mid-point of management’s guided range, offered alongside the 2022 full-year results

“Worse, management suggested that if prices flat-lined in 2023 that would knock five percentage points off operating margins, owing to input cost inflation, while the drop in volumes could slash the return on sales by another eight points. Adjusting for the £275 million hit to profits in 2022 from additional provisions for cladding remediation costs, that implies the operating margin could halve in 2023 and that operating profits could fall by up to three quarters, once the drop in revenues from lower completions and broadly flat selling prices is factored into calculations.

“This is worse than analysts had been expecting. Consensus had pencilled in a 50% drop in operating profit in 2023 to around £500 million.

“Persimmon still has plenty of net cash on its balance sheet and so it is well prepared for a potential downturn in business, especially as it went into the last downturn with a net debt position.

Source: Company accounts

“This may be why chief executive Dean Finch and the board still feel able to sanction a dividend payment of 60p per share for 2022, and set that as a minimum for 2023, even if that is a long way below the 235p that management had set as a run rate in recent years. That equates to an annual payment of around £200 million compared to the £750 million dished out in 2022.

Source: Company accounts

“The margin, earnings and dividend disappointments all explain why the shares are down.

“Persimmon is the second most highly-rated FTSE 350 builder on the basis of price to net asset, or book, value, behind only Berkeley, and a drop in its above-average profit margins may leave that above-average rating looking exposed.

“However, the shares are not down by as much as perhaps investors might expect, given the scale of the expected drop in profits in 2023 and that may – just may – suggest a good deal of bad news is already priced into both Persimmon’s shares and those of its peers. Had Persimmon paid an unchanged 235p dividend, then the stock would have been offering a 16% dividend yield based on Tuesday’s closing price of £14.52. Such a figure was not credible, given where interest rates and bond yields are today, and investors had clearly already factored in at least some degree of cut to the shareholder distribution.

“Shares in Barratt, Redrow, Taylor Wimpey and others are down in sympathy but by nowhere near as much, partly because they have already issued downbeat commentary of their own and partly because their shares are much cheaper on a book value basis.

Source: Company accounts, Marketscreener, analysts’ consensus forecasts, Refinitiv data

“Several builders are already trading at a discount to book value, to suggest that their share prices may already be anticipating a stiff downturn. There is an old rule of thumb which suggests that housebuilders are expensive when their shares at two times book value or above and cheap when they trade at one times or below.”