Can Persimmon’s share price rebound after steep drops?

Persimmon’s share price dropped over 12% at one stage last Wednesday after the UK housebuilder admitted the difficult economic outlook will hit this year’s revenue and profit numbers. Despite operating profit surpassing £1bn for 2022, evidence of the housing market downturn was reflected in last week’s pessimistic guidance as the FTSE 100 homebuilder unveiled its full-year results.

The Persimmon [PSN] share price plunged 8% last week after the UK housebuilder admitted the uncertain economic outlook is likely to hit this year’s revenue and profit.

Despite reporting an improvement for 2022, when operating profit hit £1bn, further evidence of the housing market downturn was reflected in last week’s pessimistic guidance, as the FTSE 100 homebuilder unveiled its full-year results. Demand fell sharply toward the end of last year, and the recovery so far this year has not been as strong as hoped.

In short, it looks like a tricky year ahead for the wider sector, but investors will hope Persimmon is better placed than some to withstand the downturn.

Share price subsides on downbeat guidance

Persimmon shares dropped as much as 12.19%, or 177.5p, on Wednesday, 1 March, after the housebuilder’s guidance for 2023 was much worse than analysts’ estimates, according to the Times.

However, the PSN share price did manage to pull back from that midweek intraday low of 1,275.00p, closing out the week down 111.5p, or 8%, at 1283.50p.

The housebuilder’s market capitalisation currently stands a shade under £4bn, even after the stock has plummeted 44.15% over the last year. Its shares are 15.27% off the 12 October 52-week low at 1,113.50p.

Profit beats expectations, dividend slashed

Persimmon’s revenue rose 6% to £3.82bn year-on-year in 2022, thanks to a 2% increase in completions to 14,868, while its average selling price was up by 5% to £248,616.

The developer said a close watch on costs also helped boost underlying operating profit, which climbed 4% to £1.01bn—above analysts’ expectations—despite costs rising as much as 10%. Profit-before-tax fell to £730.7m, versus £966.8m in 2021, largely due to a cladding provision of £275m. The final dividend was cut by 74% to 60p per share.

Demand and prices slide as economic reality bites

Housebuilders reported a significant drop-off in inquiries after mortgage lenders put up rates following September’s infamous mini-budget. Less than a year ago, Persimmon was selling just under one home per week at its 272 sites, but this fell to only 0.3 homes by the end of last year. This figure has improved so far in 2023, but only to 0.52, disappointing analysts.

Prospective customers are now facing an average interest rate on new mortgages of 3.9%, according to the Bank of England in January, the highest in 13 years, while mortgage approvals are also down to 39,600 in January, the lowest level since January 2009, excluding the Covid-19 shutdown.

UK house prices fell 1.1% in February year-on-year, the biggest drop since November 2012, marking the first annual decline since June 2020 amid the pandemic, said mortgage provider Nationwide last week.

According to Gabriella Dickens, senior economist at Pantheon Macroeconomics, house prices will “continue to decline over the next six months or so, resulting in a peak-to-trough fall of about 8%”, reports the Financial Times.

Dickens reckons house prices will start to rise again next year—if, that is, the UK central bank starts reducing interest rates, and energy prices ease. Nationwide chief economist Robert Gardner agrees the downward spiral has further to run, saying that “it will be hard for the market to regain much momentum in the near term since economic headwinds look set to remain relatively strong”. 

Uncertain outlook weighs on share price

Persimmon’s share price plunged last week after its warning that new home sales could fall by up to 40% this year at current demand levels, with only 8,000-9,000 houses likely to be built, down from almost 15,000 in 2022. Analyst consensus estimates indicate a likely 34% fall in revenue for 2023, with profit expected to decline by over half, closer to £300m. Margins are also predicted to contract, from 26.4% to 20.2%.

More optimistically, Persimmon could be better positioned than many of its peers to weather the current macroeconomic storms, with selling prices that are typically cheaper than average UK prices, while its significant margin means the housebuilder can cope better than most with the hike in costs.

What do analysts predict for Persimmon stock?

The 14 analysts offering 12-month price targets for Persimmon with the Financial Times have a median target of 1,313.50p, with a high estimate at 1,600.00p and a low estimate of 1,112.00p. The median estimate represents a small potential upside of 2.34% against last week’s close at 1,283.50p.

Reflecting that, analysts’ consensus view on the PSN share price is to ‘hold’, with nine recommendations. There is also one ‘buy’—compared with six a year earlier—two ‘outperform’, five ‘underperform’, and one ‘sell’.