Persimmon: U.K. Homebuyer Confidence Improves in Early 2023; Shares Materially Undervalued

Investors cheered no-moat Persimmon’s PSN 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.

While the improving sales rate is encouraging, interest from homebuyers remains at a depressed level. Consequently, the full-year outlook remains challenged with Persimmon maintaining its somber 2023 volume guidance range of 8,000-9,000 homes, which factors no further improvement in the sales rate as the year progresses and implies volumes are set to decline by a meaningful 43% year on year. Persimmon’s downbeat volume outlook mirrors that of its U.K. homebuilder peers that have also sizably downgraded their 2023 guidance for home completion volumes in recent months. The potential for subsequent recovery of home completion volumes is a key concern for investors, as homeowners spooked by the sudden financial tightening of late 2022 sit on the side lines of the housing market for the time being. The near-term direction of house prices—which have also been pressured by rising interest rates—and their potential to hamper homebuilder gross margins is a further concern of investors, particularly at a time when build cost inflation continues to run rampant in early 2023.