Company Reports

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

Demand conditions for no-moat Persimmon continue to retrace in 2024 from their cyclical nadir a year ago, with recent sales activity instructive of housing market conditions that continue to normalize. Persimmon’s first-half weekly private home sales rate improved 5% year on year during the first half of 2024 to 0.59 homes per active sales outlet (excluding the impact of bulk sales). However, Persimmon’s weekly private home sales rate for the month of July 2024 strengthened 34% year on year (excluding bulk sales). Indeed, the marked improvement in sales activity during the typically quiet summer period points to reemergence of homebuyer confidence in the second half of 2024 and aligns with our expectations for cyclical earnings recovery from 2025 onward.

We reiterate the still-significant stock price upside potential for the majority of our UK homebuilder coverage despite the positive homebuilder stock price reaction to a Labour Party victory in the UK general election. Indeed, the election result was widely anticipated given polling in the lead up to the UK general election, which predicted a landslide Labour victory. Nonetheless, the election outcome has emboldened investors, with UK homebuilder stocks leading gains in UK stocks in early trading following the election result on July 5, 2024. Ostensibly, the Labour victory has instilled greater investor confidence that the present urban planning bottlenecks to new housing supply will be appropriately addressed—a key near-term concern that has weighed on UK homebuilder stock prices. Labour’s plans to reinstate support for first homebuyers and to increase supply of other forms of affordable housing are also constructive to the homebuilder industry outlook.

No-moat Persimmon is our preferred UK homebuilder exposure, offering the best upside among our equity coverage to improving UK housing market conditions and to potential housing policy tailwinds following a likely Labour Party victory in the UK general election in early July 2024. Persimmon’s share price has partially retracted from its cyclical low in late 2023. However, with Persimmon shares still trading on a depressed price/book multiple of 1.4 times—versus an average of 2.3 times over the course of the prior housing cycle—Persimmon's stock price fails to factor in the inevitable cyclical earnings recovery and rewarding decade ahead for the major UK homebuilder. We see significant upside with Persimmon shares trading at a steep 38% discount to our GBX 2,300 fair value estimate.

Persimmon updated investors on its first-quarter trading performance. While homebuyer appetite is improving from its nadir in 2023, Persimmon’s first-quarter net private sales rate—of 0.61 homes per active sales outlet—is little changed from its prior update in March 2024. Consequently, we expect to lower our 2024 estimates given the lack of improvement in homebuyer demand in 2024 year to date and with Persimmon guiding to 10,000-10,500 home completions in 2024 (approximately 8% below our previous forecasts). Nonetheless, Persimmon shares remain attractive, trading at a 43% discount to our GBX 2,300 fair value estimate, which we don’t expect to change materially after downwardly revising our 2024 financial estimates.

While the cyclical recovery of Persimmon’s earnings is underway, the rebound in earnings in 2024 is shaping up to be more gradual than we’d previously forecast. Sales activity is improving, but at a more modest pace than we’d previously anticipated, thereby pointing to a softer second-half performance for Persimmon than reflected in our 2024 estimates. Year to date, the weekly private home sales rate on Persimmon’s development sites is ahead of last year—at 0.59 homes per active sales outlet in the first 10 weeks of 2024. While encouraging, the improvement is modest relative to 0.54 homes per active outlet in the prior corresponding period and likely holding back second-half volumes. In response to the more modest improvement in homebuyer appetite, Persimmon has—similar to its peers—continued with the use of sales incentives in 2024, which will restrain the extent to which profit margins recover in 2024, further holding back the near-term recovery in earnings for the no-moat homebuilder.

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

Persimmon’s January 2024 trading update reaffirmed our optimism for the no-moat homebuilder, with the significant improvement in Persimmon’s weekly private sales rate in late 2023 constructive for Persimmon’s 2024 outlook and its U.K. homebuilder peers alike. Persimmon’s weekly private sales firmed to 0.69 per active outlet, rising appreciably from 0.48 in the previous quarter and from 0.3 a year ago amid the depths of the U.K. housing market’s cyclical downturn. We think the marked improvement in Persimmon’s fourth-quarter sales rate is highly suggestive of a housing market entering cyclical recovery. Further, we expect the recent drop in U.K. swap and mortgage interest rates—in mid-December 2023 as interest rate markets reacted to improving inflation data points in the U.K.—will likely lend further support to the housing cycle in 2024.

Persimmon delivered a somewhat mixed third-quarter trading statement that featured positive news regarding its home completion volumes in late 2023, in tandem with a disappointing update on the near-term trajectory for build cost inflation. With Persimmon fully forward sold for the current fiscal year, the no-moat homebuilder has lifted its full-year 2023 home completion guidance to 9,500 homes, a 6% increase relative to previous guidance and our prior forecast of 9,000. However, build cost inflation has remained more stubborn than previously anticipated, with Persimmon expecting full-year 2023 build cost inflation in the range of 8%-9%, tracking above our prior full-year forecast for 6%. Consequently, our full-year EBIT and EPS forecasts of GBP 358 million and GBP 0.81, respectively, are little changed despite Persimmon’s upgrade to its volume outlook for 2023. Persimmon shares are up about 4% at the time of writing but remain materially undervalued, in our view, trading at a steep 51% discount to our unchanged GBX 2,300 fair value estimate.

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

Persimmon confirmed its soft first-half 2023 result, which saw a 36% fall in home completions to 4,249 relative to the prior year, reflecting the weaker order book to start the year. Management expects a stronger second half of the year, anticipating full-year completion to be at least 9,000, at the upper end of its previously indicated range of 8,000–9,000. Private average selling prices in the current forward book are up 0.9% since the start of the year, but management gave no further guidance on average selling price, instead stating it anticipates operating profits in line with expectation, given continued build cost inflation.

The U.K. homebuilders continue to screen attractively despite a fresh look at a number of our key U.K. housing market assumptions and consequent revisions to our financial estimates for most of our U.K. homebuilder coverage. Undoubtedly, U.K. homebuilders are staring down a difficult 2023 where profit margins are coming under considerable pressure from a combination of soaring build cost inflation and the effects of a housing market, which has entered a period of cyclical decline—causing home completion volumes to sharply contract and placing pressure on house prices.

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

Investors cheered no-moat Persimmon’s first-quarter trading update, which offered evidence of improving U.K. homebuyer confidence in early 2023, albeit off a low base. Persimmon’s weekly private sales rate improved to a first-quarter average 0.62 homes per sales outlet, implying gradual improvement as the quarter progressed and an approximate doubling of the sales rate relative to the final quarter of 2022—when forward orders sank in response to the late 2022 surge in U.K. mortgage interest rates. Persimmon shares are 6% higher at the time of writing. Our 2023 financial estimates remain largely unchanged, and we forecast full-year 2023 operating profit of GBP 334 million and EPS of GBP 0.76. With investors overly focused on the glum housing market conditions that currently prevail, Persimmon shares screen as materially undervalued—trading at a 43% discount to our unchanged GBX 2,300 fair value estimate.

We were unsurprised by no-moat Persimmon’s performance in 2022, which benefitted from strong housing market conditions throughout the first nine months of 2022 representing the cyclical peak of the U.K. housing market cycle. Consequently, Persimmon’s full-year 2022 delivery of 14,868 home completions, underlying EBIT of GBP 1.0 billion, and EPS of GBP 2.42 broadly aligned with our forecasts. Robust average selling price, or ASP, growth in 2022, proved sufficient to largely offset soaring built cost inflation, with full-year EBIT margin easing a modest 80 basis points year on year to 27.2%.

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

With the U.K. housing market having slowed rapidly in recent months, we think investors stand to profit by acting in a contrarian fashion to purchase shares in Persimmon. The no-moat U.K. homebuilder updated the market on its late 2022 performance, effectively announcing its preliminary full-year 2022 results in the process. With our long-term expectations for Persimmon intact following the trading update, we make no change to our GBX 2,340 fair value estimate. Persimmon shares continue to screen as compelling, trading at a 40% discount to our valuation.

The equity market’s initial take on Persimmon’s newly minted capital allocation policy—announced in conjunction with its November 2022 trading update—is unnecessarily grim in our view, with Persimmon shares declining by as much as 8% in early trade. The negative share price reaction is partly explained by freshly announced provisions for legacy building safety remediation costs that lead us to lower our fair value estimate by 2.5% to GBX 2,340.

Persimmon is the U.K.’s second largest homebuilder, in terms of both revenue and dwelling completions, operating under a speculative build model that is vertically integrated through the land development, construction, and sales and marketing segments of the value chain. Playing predominantly in the lower-priced segment of the newbuild market, about 50% of Persimmon’s private market sales are to first-homebuyers. Persimmon also has limited exposure to the premium end of the newbuild market via its Charles Church brand that markets higher-priced housing in more premium locations that are built to a higher specification standard.

We lower our fair value estimates for our U.K. homebuilder coverage in the range of 5%-6% with the U.K. government abandoning its prior plan to introduce a range of unfunded and controversial tax cuts. Consequently, the U.K. corporate tax rate is now set to increase as originally planned to 25% in April 2023, up from a current 19%. Therefore, we increase our long-term effective tax rate assumption for our U.K. homebuilder coverage by 6 percentage points to 29%, inclusive of the 4% residential property developer tax, which came into effect in April 2022. Our revised fair value estimates for no-moat Barratt Developments, no-moat Taylor Wimpey, no-moat Persimmon, and no-moat Berkeley Group are GBX 710, GBX 180, GBX 2,400, and GBX 4,700, respectively. We make no change to no-moat Bellway’s fair value estimate of GBX 3,670, having previously incorporated the increase in its effective tax rate into our financial estimates in conjunction with its fiscal 2022 full-year result on Oct. 18, 2022.