Stock in giant U.K. homebuilder Persimmon tumbled on Tuesday after the FTSE 100 company posted a drop in sales, scrapped its dividend and gave a grim outlook for next year’s housing market.
Persimmon shares
PSN,
fell as much as 8% to a low of 1,201.50 pence during Tuesday morning trading in London, though have since pared that to a loss of 6.6%, to 1,240 pence.
In a trading update, the homebuilder said it expected sales to fall in 2023. As well, due to the disastrous mini-budget announcement from the government and “deteriorating economic outlook”, the average private weekly sales rate fell to 0.48 in the last six weeks. From July 1 to Nov. 7, the average rate stood at 0.6, a drop from 0.78 in 2021.
Persimmon recorded 9,974 homes built for the period from July 1 to Nov. 6, declining from 10,728 a year prior.
It also noted some uncertainty given cancellation rates have risen to 28% from 21% in the last six weeks. “Rising interest rates and broader economic uncertainty are clearly impacting mortgage lending and customer behavior,” Chief Executive Dean Finch said.
The homebuilder said it would end its dividend policy to reflect “increased uncertainty”, a rise in corporation tax and the residential property developer tax, which the government implemented to make developers pay to replace unsafe cladding, stemming from the Grenfell Tower disaster.
The group said replacing unsafe cladding will now cost around £350 million ($400 million). That’s almost a fourfold increase from the £75 million estimate for those costs that it gave investors in August during half-year results.
Executives chalked the increase down to “significant build cost inflation” and a “broader scope required by government, which has resulted both in an increase in the amount of work required and in the number of eligible buildings.”
Looking ahead, Persimmon bosses said while it was too early to publish guidance for 2023, they expect “fewer legal completions than in 2022 and this together with a deterioration in average selling prices will have an impact on 2023 margins.”
“It feels like reality is starting to catch up with the housebuilders,” said Derren Nathan, head of equity research at Hargreaves Lansdown, in a note to clients.
Liberum analyst Charlie Campbell said while cracks were appearing in the U.K property market, homebuilder uncertainty was at its worst and should ease up, along with mortgage rates. He expects the latter to have “softened at least a little” by January 2023.
“The sector looks cheap to us, and is pricing worse outcomes than look likely. We continue to see value in the sector and expect improving performance in 2023 as inflation and rate expectations peak,” he added, branding a buy rating and a price target of 1,720 pence.
But Citi analyst Ami Galla was less bullish.
She said generic risks for the whole sector also apply to Persimmon, with the tapering of the government’s Help to Buy programme to get first-time buyers on the property ladder also possibly affecting sales rates and volumes.
She gave Persimmon a neutral rating and target price of 1,207 pence. “As the group is likely to take a more prudent approach to dividends heading into a recession, we attach 100% weighting to net asset valuation approach to arrive at our target price,” she said.
