Full-year results from Persimmon PLC (LSE:PSN) this morning cemented its position as the big beast in the house construction sector.
The shares advanced 4.6% to 2,428p, taking the market capitalisation up to £7.4bn, a good £1.7bn clear of nearest rival, Barratt Developments PLC (LSE:BDEV), £2.3bn ahead of Taylor Wimpey PLC (LSE:TW.), £3.3bn above Berkeley Group Holdings PLC and £4bn in advance of Bellway Group PLC.
It may be the biggest but it has not always been the most popular; the company provoked intense anger when a poorly conceived executive bonus scheme allowed Jeff Fairburn, at the time the company’s chief executive, to collect a £75mln bonus (scaled back from £110mln) one year mainly as a result of having the good luck to be the boss at the time the government was doing its best to boost house prices with its (also) poorly conceived “Help to Buy” scheme.
The bonus scheme - said to be most generous ever from a FTSE 100 company and linked to share price performance - paid out about £500mln worth of shares to 150 senior staff.
There are signs, however, that the company is now focusing on repairs … to its reputation as well as its houses.
It announced today it anticipates receiving a five-star rating in the annual Home Builders Federation (HBF) survey later in March 2022, which would represent a first in the company's history.
In January, it said it agreed flat owners should not have to pay to remove cladding from their properties in the wake of the Grenfell Tower tragedy in June 2017 that saw 72 people die as a result of a fire that investigators believe spread so rapidly because of the polyethylene material used in the cladding.
“We share the Secretary of State's aspiration that leaseholders should not have to pay to remove cladding,” the group said in January
"A year ago, we adopted an industry-leading position regarding the remediation of all cladding and fire-related defects on a small number of buildings developed by Persimmon over the last 30 years, which is consistent with the recent amendments to the Building Safety Bill. We await further details including any widening in scope of those developments brought within the Building Safety Levy,” it said today.
Persimmon delivered 14,551 homes in 2021 at an average selling price of £237,000, generating revenues of £3.61bn, which was slightly Peel Hunt’s estimate of £3.74bn.
Underlying profit before tax grew 13% from a year earlier to £973mln, “slightly below our estimate but comfortably ahead of the somewhat lagged consensus”, Peel Hunt reported.
Dividing the profit by the number of houses built implies a profit of £66,868 per home.
"The new year's trading has started well, with private sales rates ahead by c. 2% in the opening weeks and a robust forward sales position of £2.21bn. We expect to grow our outlet position in 2022 and are targeting volume growth of 4-7% on 2021 levels, whilst maintaining our industry-leading margins,” said Persimmon’s chief executive officer, Dean Finch.
Those “industry-leading margins” rose to 28.0% last year from 27.6% the year before as a result of “effective supply chain management, cost control and the group's vertical integration, together with strong selling prices”.
The company will pay an annual dividend of 125p on April Fool’s Day – no, really – and intends (subject to review) to pay 110p of surplus capital to shareholders in July.
“Some short term uncertainties remain, particularly regarding cost inflation, potentially rising interest rates and the impact of the current geopolitical environment on the UK economy. The speed of achieving planning consents remains an issue and the withdrawal of the Government's Help to Buy scheme is still planned for March 2023. In addition, the recent Building Safety Bill amendments include the potential significant widening of those developments brought within the Building Safety Levy's scope,” the company cautioned.
Nevertheless, the group’s size and track record of efficiency leave management understandably confident of the group’s future success.
That being said, the shares have fallen from 2,856p at the end of 2021 to around 2,409p, reflecting concerns about rising interest rates, ballooning build costs and supply chain difficulties.
With a projected dividend yield of 9.33% and the suspicion that so long as there are votes in rising house prices the government won’t do too much to inconvenience housebuilders, the shares look a good bet for income investors.
Peel Hunt and Liberum Capital Markets both rate the shares a buy; the former has a price target of 3,300p and Liberum a target of 3,090p.