Persimmon: Relief From Searing Build Cost Inflation Yet to Materialize in Late 2023; Shares Appeal

Persimmon PSN 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.

While we’re underwhelmed by the persistence of build cost inflation in 2023, we still expect profit margin relief to eventuate in 2024, with Persimmon securing price reductions for both labor and building materials in recent months. We’d previously expected build costs would cool a little faster, benefiting profit margins from late 2023 onward. Broadly speaking, average selling prices have also remained firm, boding well for profit margins in 2024 and according with our view that recent increases in U.K. mortgage interest rates represent more of a headwind to house price growth in late 2023 and are unlikely to elicit a significant house price correction.

Our long-term view—and corresponding fair value estimate—contrasts with the ongoing investor pessimism for Persimmon and its peers, all of which trade on significantly depressed price/book multiples.