Persimmon shares try to build a base as sales rates start to improve

• Completions drop 42% year-on-year in first quarter
• Builder flags improvements in visits, cancellations and sales rates
• Volumes may come in at top end of guided range for 2023 if current trends persist

“It may seem odd that Persimmon’s shares should rise when the firm unveils a 42% year-on-year drop in first-quarter completions, but the stock is down by some 40% over the past year and, if anything, the news is marginally less bad today than when the FTSE 100 member announced its dividend cut back in March,” says AJ Bell investment director Russ Mould. “Chief executive Dean Finch is signalling higher customer visits, lower cancellations and improved sales per site to perhaps suggest that the worst may be over, even if input cost inflation and higher interest rates remain key challenges, especially as house prices are not making much progress.

“Persimmon is even suggesting that completions in 2023 could reach the top end of the 8,000 to 9,000 guided range provided by the company earlier in the year. If the York firm does manage to complete on 9,000 dwellings that would still mean a 40% drop from last year’s total of 14,868, but it also suggests that the first-quarter decline is hardly news to the investors.

Source: Company accounts, top end of management guidance range given for 2023 alongside 2022 results.

“The market is also already anticipating a big drop in earnings this year. Pre-tax income is seen almost halving to £380 million in 2023, and that is against a base that was depressed by 2022’s £275 million in additional provisions for cladding compensation costs.

“Such a forecast is consistent with management’s March guidance that if prices flat-lined in 2023 that would knock five percentage points off operating margins, owing to input cost inflation, while the anticipated drop in volumes could slash the return on sales by another eight points.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“Again, the Q1 update may not look great, but it is no worse than prior statements. In addition, 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 Great Financial Crisis with a net debt position.

Source: Company accounts

“The share price gain could therefore be a classic example of how markets are forward-looking mechanisms that feed off the second derivative – the rate of change in the rate of change.

“The thinking may be that business is still bad, but it is getting worse more slowly or even starting to stabilise, and once business stops getting worse, then one day it will get better. If business is going to get better, that could be good for the share price and if the share price is going to move then there is no point in waiting to buy… Or so the theory goes.

“Persimmon’s shares have done this before. They performed very strongly during the 1990-91 recession.

Source: Refinitiv data

“The shares also sailed through the 2001 downturn.

Source: Refinitiv data

“On each occasion, the builder anticipated a drop in interest rates from the Bank of England, and cheaper borrowing, and thus mortgages.

“Markets are once more looking for a peak in Bank of England base rates, even if further increases seem possible this year. While the timing of any such peak is far from clear or certain, builders are very sensitive to rates and any sniff of a first cut could mean their shares start to move higher, at least if history is any guide, as that would be seen as potentially helpful for future demand.

“Any prospect of an upturn in sales and profits could persuade investors to revisit a sector that fell horribly from favour in 2022. Many of the FTSE 350-listed builders are trading below book, or net asset, value, and their strong balance sheets mean they can keep paying dividends, although it will be interesting to see if the firms start to prioritise buying land over cash returns to shareholders at some stage, as they prepare themselves for the next upcycle.

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

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