Demand for new build homes has remained resilient despite the pandemic. What should traders expect from Persimmon’s half-year earnings on Wednesday?
When does Persimmon report earnings?
UK housebuilder, Persimmon (PSN:LON) reports first-half earnings at 07:00 UK on Wednesday 18 August 2021.
Comparisons with the same period last year will be difficult to measure because of the coronavirus pandemic which twisted all markets. Additionally, comparing 2019 will be difficult as some of the government schemes that were in place two years ago are no longer available.
What is expected?
With the period marking a return to some sort of normality following the series of lockdowns driven by the spread of Covid-19, investors and traders will want to hear some calming words from the company and evidence that the pent-up demand, resulting from the market in the first half last year, has continued.
This is what the company said about the picture as it saw it at the end of 2020: the onset of the Covid-19 pandemic brought significant uncertainty, however, demand for new build homes has remained resilient. During the second half of the  year, the housing market has been boosted in part by pent-up demand following the first national lockdown and Government stimulus, such as the stamp duty holiday and the original Help to Buy scheme which closed for new reservations on 15 December 2020 in England.
Strong sales rates continued through to the end of the year, with the Group achieving a 12% higher weekly average private sales rate compared to the same period last year. Will this trend continue? There is a lot for the housebuilder to consider in terms of the backdrop.
UK housing market dynamics
1. Housing Supply
There is a chronic shortage of suitable housing across the UK. Persimmon reminds us that: ‘…despite generally increasing output, it is estimated that a shortfall of over 1.2 million homes since 2008 exists in England. The Government remains committed to its current target of supplying 300,000 homes per year by the mid-2020s to attempt to combat the imbalance between supply and demand.’
The government is urging housebuilders to increase supply, but this is not in the interests of the housebuilders. The way to keep prices, and so profit margins, high is to limit the number of new houses on sale. The argument, too, from the housebuilders is that labour and building materials are not easily available so an increased rate of build is not possible. Additionally, house builders are not prepared to supply the low cost housing that is required.
Part of the problem for first-time buyers is that there is a high cost bar for entry. The frustrating thing, for most that are renting, is that monthly rental costs are very often less than the cost of a mortgage, but very few can raise the deposit needed to buy their first home. Building low cost housing is not really an option as housebuilders prefer to target the higher margin opportunities.
2. Interest rates and mortgage availability
In the wake of the financial crisis the government prevented mortgage lenders from over-extending mortgage holders' debt burden and this has led to a tightening of conditions for taking out loans on property. Recently this has been loosened, but it is still difficult for some to qualify for a mortgage despite record low base lending rates from the Bank of England.
The mortgage market has been very competitive since the start of 2020 and, with Covid, lenders have been keen to widen the array of mortgage products on the markets to bring more and more people back into house ownership. However, one area of the market mortgage lenders have been tightening is in higher loan to value products.
3. Government house purchase schemes
This has been a saviour for housebuilders and we see this mentioned again and again as a big driver, especially for first time purchasers. The Help to Buy plan has been great for some across the devolved governments but other equity loan schemes, including shared ownership, have also enabled many to buy, despite critics of all the initiatives. Without these schemes, UK housebuilders would have been in a more difficult position. Then there were the reductions to house purchase Stamp Duty across the spectrum for all those moving house.
4. Planning and regulation
Much to the annoyance of some, the government is supportive to the housebuilders and has brought in the National Planning Policy Framework, published in July 2018. This aims to make it easier for planners, developers and local councils to deliver good quality housing at a faster pace in places where people want to live. But, it is encountering considerable opposition from those who believe that urban creep is ruining what little open countryside there is around some of the UK's big cities.
Then there is the consideration for the environment. On 1 October 2019, the Government proposed new regulations aim to ensure that all new homes built from 2025 will produce 75-80% less carbon emissions than homes delivered under current regulations. The Group has established a low carbon home Steering Group to manage its transition to low carbon homes. This is another requirement for the housebuilders to consider.
Persimmon earnings expectations
If the recent performance of arch rival Taylor Wimpey is anything to go by, we could see a nice upside surprise from PSN.
Taylor Wimpey reported record numbers of completions as it returned to the market following the Covid lull last year. This is the problem with these first-half numbers this year: any direct comparison with 2020 is always going to be skewed by the Covid-driven lull.
The dividend could also be of interest. PSN currently yields just over 8% which is extraordinary given the circumstances. Can the company keep up that rate?
In any event this may dissipate if shares rise, which is the best case so far as the technicals are concerned.
How to trade Persimmon stock
Clearly the day will be driven by the news and, if there is an upside surprise, this would reinforce the technical set up for shares to rise.
The downward-facing wedge pattern established over the last few weeks is a bullish pattern which usually resolves on the upside. You can establish the size of the breakout from a bullish wedge by measuring the height of the pattern, which here is roughly the length of the candle on 8 July, and project it from an upside breakout to the downward facing line of resistance.
This would give us an upside price target of around 3100p per share. The upward move is also backed up by the oscillator at the bottom of the chart. This is the Moving Average Convergence Divergence which is a momentum indicator. The point at which the solid blue line breaks above the red dotted line indicates an upward momentum and, for many, is a buy signal.
So the trade set-up here is for a long position at 2909, with a price target of 3100 and a stop-loss below the underside of the rising line of support at 2770.