Persimmon Earnings: Shares Appealing Despite Bleak 2023 Outlook Amid Slowing Housing Market

We were unsurprised by no-moat Persimmon’s PSN performance in 2022, which benefited 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%.

However, a decidedly bleak 2023 outlook reflecting the presently depressed mood of the U.K. housing market caught investors off guard, causing Persimmon shares to drop by 10%. We believe investors were most surprised, as were we, by the extent to which Persimmon thinks home completion volumes could fall by in 2023 as the recent surge in mortgage rates slows the housing market. We’ve lowered our full-year 2023 volume assumption by a meaningful 25% to 8,975 homes with Persimmon not confident that its presently depressed home sales rate will improve throughout the remainder of the year. In turn, we lower both our full year EBIT and EPS forecasts by 37% to GBP 334 million and GBP 0.76, respectively, as fixed cost recoveries deteriorate on lower home volumes. We also lower our fair value estimate by 2% to GBX 2,300 to account for our reduced 2023 earnings estimates.

Certainly, 2023 is shaping up as a challenging year for Persimmon and its homebuilder peers alike as volumes contract and profit margins come under pressure from falling house prices and heady build cost inflation that continues unabated. Still, with present housing market turmoil likely transitory, we continue to anticipate volume and profit margin recovery medium-term. With investors overly focused on the soured near-term outlook, Persimmon shares trade at a sizeable 44% discount to our revised fair value estimate.