Persimmon warns on profits and slashes dividend by 75% as builder stares down the barrel of housing market slump
- Inflation could cost margins 500bps in 2023, with another 800bps at risk
- Persimmon’s dividend cut from 235p last year to just 60p in the year ahead
- The housebuilder expects to complete 8,000-9,000 transactions in 203
Persimmon has issued a profit warning and slashed its dividend by 75 per cent as the British builder faces up to a slowing UK housing market.
The housebuilder, which began flagging slowing demand in the second half of last year, told investors on Wednesday its 2022 underlying profit margin of 27.2 per cent could be chopped down by 500 basis points, or 5 per cent, as a result of annualised cost inflation of 8 per cent.
Its margins could dip another 800bps (8 per cent) as a result of reduced volumes, and increased sales incentives and marketing costs. The builder said its weekly sales rate had almost halved.
As a result, Persimmon has slashed its dividend to 60p from 235p last year.
Sales have been hit as the UK housing market has slowed significantly over the last year
Persimmon shares fell 9.2 per cent in early trading to £13.18, bringing losses to 43 per cent over one year.
The UK housing market has slowed in recent months, as higher mortgage rates and broader economic concerns drive homebuyers away and falling house prices squeeze margins.
Britian’s biggest building society Nationwide reported today that house prices are falling annually for the first time since the start of the pandemic.
Persimmon’s average net private weekly sales rate currently stands at 0.52, compared to 0.96 a year earlier.
Its current forward sales stand at £1.52billion, including private average sales of £810million, with an average selling price of £288,638 ‘indicating that pricing remains firm’.
Persimmon said while it is ‘too early’ to assess a full-year sales rate, current rates imply 8,000-9,000 legal completions for 2023, down from 14,868 in 2022 and 14,551 in 2021.
Persimmon is not alone among peers warning of the impact of a slowing housing market, with Barratt Development, Redrow and Bellway reporting a severe downturn in their forward order books last month.
Group CEO Dean Finch said: ‘The market remains uncertain. Our marketing campaign has helped improve the group’s sales rates in the new year from the lows at the end of 2022, but they still remain lower year on year.
‘We have carefully managed our pricing, recognising the improved value and energy efficiency of our product in these difficult times and sales prices have proved resilient.
‘We responded quickly to stimulate sales, enhance cost controls and preserve cash, promptly slowing new land investment in the fourth quarter of last year.
‘Nonetheless, the sales rates seen over the last five months mean completions will be down markedly this year and as a consequence, so will margin and profits. However, it is too early to provide firm guidance.’
However, Persimmon did perform better than expected last year amid worsening market conditions.
Underlying pre-tax profit rose 4 per cent to just over £1billion in the year to 31 December, compared to an average of analysts’ estimates of £983.4million.
Head of markets at Interactive Investor Richard Hunter said: ‘Persimmon has ground out a creditable performance considering the challenges of the last year, although the current outlook is rather more troubling.
‘All things considered, the housebuilding sector is one which is currently fraught with difficulties and the share price performance reflects the changing of the tide.
‘Over the last year, Persimmon shares have fallen by 40 per cent as compared to a jump of 7.4 per cent for the wider FTSE 100, despite a more recent relief rally of 14 per cent over the last three months, which has been largely undone in early trade following these results.
‘Perhaps more noticeable is the effect on the general view of the shares. After some considerable time of a positive consensus which included Persimmon as one of the preferred plays, the market consensus of the stock has now switched to a sell, implying that in terms of the economic cycle, the worst may yet be to come.’