Though news that the Help to Buy scheme could change has caused some concern for the future.
Positive 2018 boosts shares by 2% for Persimmon (PSN) in early trading
- Record operating profits and improved operating margins welcome news for investors
- Flat completion projections in 2019 set to pressure results moving forward
- Good income returns and margins lead us to view the stock as a ‘hold’ for investors willing to accept a higher level of risk.
After Persimmon's shares took a beating yesterday from the weekend press over how well the group has benefited from the Help to Buy scheme and its quality controls, investors this morning can actually focus on the last year’s performance. They weren’t disappointed, sending the shares up by over 2% in early trading. With legal completions up modestly and average selling price up by 1%, the group’s revenues grew by 4% to £3.74bn.
While this was a slower rate of growth compared to recent years, investors will cheer at the fact that operating profits and profits before taxes for the first time breached the £1bn level. While operating margins for the year as a whole was at 30.8% compared to the previous year’s 28.2%.
Investors in housebuilders saw positive returns, but this may be changing
For investors in housebuilders, the story of recent years has been of very attractive capital returns. This continues with Persimmon’s latest dividend matching that of the previous and still holding an amazing yield. However, we take the view that the surging growth rates in house building activity has waned. This is evidenced by the latest numbers and the group’s current forward order book of £2.02bn compared to the same time last year at £2.03bn.
Persimmon has been one of the key beneficiaries of the government’s Help to Buy scheme, accounting for roughly 50% of sales. This is more than any other major housebuilder. And the weekend’s news that there may be changes to the scheme will hurt Persimmon more than any other company.
On top of that, housing activity is slowing amid the political uncertainty. Dave Jenkinson, the new CEO, has a far tougher job than his predecessor to maintain growth rates. Given that the group expects completions to be flat during 2019, if average selling prices (which have lost momentum) do not head higher still, this could be the first time in many years of revenues declines.
It, therefore, becomes all the more important to further improve upon the profit margins. But this task is made difficult by rising material costs and the shortage of skilled labour. They are attempting to address the labour issue through extensive training and recruitment programmes, but the other major challenge will be the uncertain political climate. He must also address the group’s reliance on Help to Buy, quality controls and customer satisfaction scores.
Our View on Persimmon - Hold
While the shortage of housing in the UK and attractive mortgage rates are key drivers for demand, we take the view that the best days for the housebuilding sector is behind us. With good profit margins, income returns to shareholders will still be good, but we can at best recommend the stock as a hold for investors willing to accept a higher level of risk.
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