Why is the Persimmon share price up after profit slump?

Persimmon’s share price has built some solid gains over the past month. An easing in inflation and the UK’s big four lenders promising to cut mortgage rates has helped. Yet in first half results the FTSE-100 homebuilder revealed a sharp downturn in demand.

• Persimmon’s share price is up over 7% this month, but remains down year-to-date.
• Underlying operating profits drop by almost two thirds to £152m in H1. 
• 300 jobs axed in £25m cost-cutting quest.

Persimmon’s [PSN.L] share price has built a decent return for shareholders this month. Yet year-to-date the stock is down 7.5% as UK homebuilders face a range of headwinds. Chief among them is the affordability of homes, as mortgage rates remain heightened.

These challenges came to the fore in first-half results published Thursday last week, as Persimmon became the latest homebuilder to post a sharp decline in sales. Adding to the pressure is the removal of the government’s Help to Buy scheme. 

Persimmon’s earnings fall in first half

Persimmons said it had completed 4,249 new homes in the first six months of the year, down from 6,652 at the same point the previous year. The homebuilder blamed ‘market challenges’ following last year’s Autumn ‘mini-budget’ for its reduced order book. The reduction also squeezed profit margins from 27% to 14%. Persimmon said margins were expected to improve in the second half of the year.
 
Group revenue fell to £1.19bn in the period, down from £1.69bn. Underlying operating profit shrank almost two-thirds to £152m, down from £440.7m. 

Despite the sharp downturn in first-half numbers, the FTSE 100 homebuilder said that it expected annual profits to be in line with its expectations, although it didn’t confirm what those expectations were. 

“We are on track to deliver profit expectations for the year and are building a platform for future growth,” said CEO Dean Finch.

Persimmon said it expects at least 9,000 home completions this year, in line with the top end of its previous guidance. This optimistic outlook helped Persimmon’s share price climb over 3% in Thursday’s early morning trading.

What’s happening with the Persimmon share price?

Despite the doom and gloom, PSN shares have gained over the past month. One tailwind has been an easing in inflationary pressure. Inflation in June came in at 7.9%; while that’s still high, it’s down on May’s 8.7% reading. Lower inflation should eventually translate to interest cuts that will make mortgages more affordable. 

Yet the Persimmon share price remains well off the 1,900p level it was trading at in August last year. The nadir came on 7 July when Persimmon’s share price hit a low of 953p. Since that point the stock has rallied. Whether it can get back to its 52-week high of 1,866p remains to be seen.

Where next for Persimmon’s share price?

Persimmon is weathering a storm of headwinds right now. The question is how long the storm will last. It’s not the only homebuilder grappling with sluggish market conditions. Rival Bellway [BWY.L] also reported a decline in revenue and home completions when it updated the market.

The UK still faces a housing shortage, which Finch described as “historic” in his interim statement. An easing in mortgage rates will help make home buying more affordable for more people once again. Last week the four big UK lenders announced that they would be cutting mortgage rates for the second time in three weeks. More announcements like this could benefit the Persimmon share price.

Cost-cutting is another lever Persimmon can reach for. It has already axed 300 jobs in the first six months of the year as part of its quest to carve out £25m-worth of annual savings. Persimmon will review subcontractor packages on a more regular basis in an effort to maximise value and reduce cost inflation.

Persimmon has a 12-month median price target of 1,230p. Hitting this would deliver an 8.9% upside on Friday’s close.