Thoughts on Persimmon’s trading update

Headlines about Persimmon in the news last year must have made their PR people want to find the nearest wall to bang their head against. One BBC headline from December 2019 was ‘Builder Persimmon lacks minimum house standards, report finds.’ Another headline in The Times in March of that year read ‘Bonus row Persimmon chief Jeff Fairburn was paid £85m.’

The business was in a mess. Yet I stayed invested in the shares. Partly that’s because other housebuilders, most notably Bovis Homes have had to go through a similar turnaround in recent years. It was also partly because Persimmon promoted an insider to the top job when Jeff Fairburn was forced out of the company over the handling of his bonus. That’s all in the past though.

A recent trading update showed Persimmon is making progress and I think the future looks bright. At least in the long-term, meaning at least five years. I’ll be holding my shares and may look to add on any share price weakness. Below 2,000p is for me an ideal time to buy; this would be about 23% below where they are at the time of writing.

The latest trading update

On the 9th July 2020, Persimmon released a trading update ahead of its half-year results to 30 June 2020. These will be released on Tuesday 18 August 2020.

I was particularly interested in the trading highlights in the update:

  • Total revenues of £1.19bn (2019: £1.75bn)
  • New home legal completions of 4,900 (2019: 7,584)
  • Average selling price of c. £225,050 (2019: £216,942)
  • Use of online resources ensured sales continued through the lock down period, with c. 1,600 gross reservations secured in the 9 weeks ended 17 May 2020
  • Strong performance in the six week period since sales offices re-opened in mid-May – with average weekly net private sales reservations of 278 new homes, c. 30% higher than the same period last year
  • Encouraging forward order book with forward sales of new homes at 30 June 2020 of £1.86bn (2019: £1.62bn), c. 15% higher than last year
  • Cancellation levels remain in line with historic trends

It’s worth noting when it comes to total revenues the company clarifies that means: “The Group’s total revenues include the fair value of consideration received or receivable on the sale of part exchange properties and income from the provision of broadband internet services. Housing revenues are the revenues generated on the sale of newly built residential properties only.”

Positives in here then, despite covid-19, with prices rising and customers still showing interest in purchasing property. That’s likely to be even more so now that the Chancellor has raised the threshold for paying stamp duty.

Speaking about the trading update the outgoing boss, said: “…over the last six weeks when net reservations have been c. 30% ahead year on year. We enter the second half in a strong position, with work in progress well advanced, forward sales c. 15% ahead year on year, and cash holdings of c. £830m. “Our financial strength and the agility of the business in responding to Covid-19 has ensured Persimmon is in robust health, and fully able to play its part in delivering the new homes the country needs to support the UK’s recovery, in a range of future economic scenarios.”

Other housebuilders also recovering

Overall, I think the results are in line with the updates we’ve seen from other housebuilders. FTSE 100 rival Barratt Developments also updated in July 2020. That trading update showed completion volumes were significantly reduced by the lockdown period with 12,604 total homes including joint ventures completed during the year (2019: 17,856 homes). But on the positive side there has been high customer interest levels since sales centres reopened. Barratt also saw its average sales price rise which is encouraging.

Turning back to Persimmon I’m optimistic because there will be an outsider appointed as a CEO towards the end of the year. Dean Finch will be joining from National Express. Dave Jenkinson, who replaced Jeff Fairburn, has made inroads into cleaning up Persimmon’s reputation which has affected revenue during his tenure. I believe it was necessary work to repair the company’s image and should help Persimmon in the future.

Final thoughts on Persimmon shares

So covid-19 has had an impact but Persimmon seems well placed to survive along with the other big housebuilders. The share prices are cheap in my view. There’s also I think the potential for dividends to be reintroduced if the economy can improve from here. Now some of the builders are returning furlough cash to the government I think reintroductions of suspended dividends has to be on the cards. This should boost share prices.

This could well be the case at Persimmon particularly because it has large amounts of cash. It’s also not focused at the higher end of the market or on London property, both of which are struggling. Redrow, for example, announced it would be scaling back housebuilding in the capital.

I’m reassured by the trading update and think Persimmon will be a holding for me for a long time to come unless the outlook changes drastically. I really don’t think it will any time soon.

Thanks for reading this. Please do note I own shares in Persimmon and Barratt Developments. If you have enjoyed reading this article I have also written about investing in the US tech stocks known as the FAANGs. Please do take a read if you’re interested.

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