Reduced volumes negatively affects company's operating margins
UK house builder Persimmon has reported a 65% drop in underlying operating profit as the number of its new home completions also dropped by more than a third in the six months to June 30.
The company said its underlying operating profit reached £152.2 million in H1 2023, down significantly from the £440.7 million posted in H1 2022. Pre-tax profit fell from £439.7 million to £151 million.
While new home average selling price increased to £256,445 from £245,597 of the previous year, the number of new home completions was 36% lower this year at 4,249, compared with last year’s 6,652.
However, group private average selling price went up by 8% year on year to £288,327, partially reflecting a greater proportion of larger homes sold.
“The reduced volumes in the first half of the year have negatively affected our operating margins as we predicted earlier in the year,” Dean Finch, group chief executive, stated in the company’s half year results announcement. “As we look forward, we expect increasing completions to result in improving operating margins.
“Against a backdrop of higher mortgage rates, the removal of Help to Buy, and significant market uncertainty, Persimmon has delivered a robust sales rate, excluding bulk sales, while growing the private average selling price in our forward order book, and also securing cost savings. We are on track to deliver profit expectations for the year and are building a platform for future growth.”
Bellway, another house builder, earlier reported a drop in its annual revenue, with housing completions also lower this year compared with last year. It expects to build fewer homes this year.
“New home buyers are clearly exercising greater caution, and frankly who can blame them,” commented Charlie Huggins, manager of the quality shares portfolio at Wealth Club. “This has presented a very challenging backdrop for Persimmon and its peers.
“The outlook for Persimmon is murky at best. House prices have held up better than expected so far, but cracks are starting to appear. And while interest rates should be close to peaking, this offers little succour for first time buyers. Until there is greater clarity on the future path of interest rates, it seems unlikely the pressure on the housing market will ease any time soon.”
John Choong, equity analyst at Investing Reviews, said Persimmon’s gut-wrenching drops in its latest results showed that mortgage rates continued to strangle affordability, especially for first-time buyers, who represented the bulk of the house builder’s customer base.
“Not only did completions drop by a staggering 36%, but revenue and pre-tax profits also fell 30% and 66% respectively,” he noted. “The higher percentage of more expensive properties has helped to offset the astronomical decline in completions slightly. Even so, the short-term outlook for Persimmon isn’t bright as mortgage rates hover around their highest levels since 2008.
“The recent cuts in mortgage rates by several major lenders are promising, but the future trend of rates is heavily dependent on next week’s wage growth and inflation data. Any unwelcome surprises could trigger yet another round of turmoil for the housing market and Persimmon.”
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