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Can Persimmon’s share price rally after first-half profit slump?

Housebuilder Persimmon [PSN] reported a 1.4% drop in pre-tax profit, which fell to £509.3m for the six months ending 30 June. It sold 7,584 new homes, down 6% on the previous year. 

Revenue declined by 4.9% to £1.75bn and new home revenue was down by 5.2% to £1.65bn, according to the report. Meanwhile, earnings per share dipped 4.15% to 129.3p.

Persimmon said the slump is largely down to the care it is taking to improve the quality and fire safety of its homes, something it had to do after facing a wave of criticism surrounding faulty ‘Help to Buy’ homes earlier this year. 

The company said it had spent 40% more on customer service than in the same period last year, which will lead to a £15m annual increase in customer care costs.

£15million

Annual spend increase in customer care costs

  

Steady share price on positive margins

Persimmon’s new house operating profit margin improved to 31% from 29.7% year-over-year. It has fallen from 31.8% from the second half of 2018.

“Persimmon’s margins are by some distance the highest among the national housebuilders,” Alastair Stewart of Progressive Equity Research told the Financial Times. The analyst said that given the downward pressure on the market as a whole, the reduction compared with last year’s second half seemed modest. 

 

 

Activity in the UK construction industry has dropped to its lowest in a decade, according to IHS Markit data released this July. The research firm’s construction purchasing managers’ index dropped to 43.1 last month, well below the 49.3 figure analysts were expecting. Much of the slowdown appears to be a result of uncertainty linked to Brexit.

It seems Persimmon’s competitors are facing a much tougher time, however. Kier’s [KIE] share price has plummeted by 72% this year up to 20 August and Balfour Beatty [BBY] by 13%, while Persimmon shares suffered just a 4.8% dip. 

Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown, said: “In normal circumstances, a drop in completions and revenues would be a warning sign for a housebuilder but while the blip to the top line might not make for pleasant reading, it’s actually good to see Persimmon applying the brakes.

“Following a flurry of customer dissatisfaction, it took the decision to temper the speed at which it released homes to market, in a bid to avoid a repeat performance.”

“In normal circumstances, a drop in completions and revenues would be a warning sign for a housebuilder but while the blip to the top line might not make for pleasant reading, it’s actually good to see Persimmon applying the brakes” - Hargreaves Lansdown analyst Sophie Lund-Yates

 

  A sunny outlook?

Persimmon’s forward sales are “strong”, according to the company, at £2.05bn. The housebuilder’s chair Roger Devlin, did however warn that the company is facing rising cost pressures. 

Market cap£5.976bn
PE ratio (TTM)6.68
EPS (TTM)280.80
Quarterly Revenue Growth (YoY)3.10%

Persimmon share price vitals, Yahoo Finance, 21 August 2019

“We have continued to experience some pressure with respect to the cost and availability of certain materials in the supply chain as the output from the industry continues to expand. We currently anticipate that cost inflation for the group will be around 4% for the current year,” he said.

“The group remains focused on self-help measures to mitigate these challenges. These include the use of the group's standard house types, utilisation of in-house manufactured brick and our collaborative approach to working with our sub-contractors and suppliers.”

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