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Home builders rely heavily on government policies and regulations. This was evident throughout the 2010s, when home ownership was heavily promoted with schemes such as Help to Buy and the sector collapsed. None more, perhaps, than Khaki (LSE: PSN), whose value has increased around 20 times in less than a decade.
the times
While stocks have stagnated since then (thanks to supply-cost inflation, more expensive mortgages, and a cost-of-living crisis), times are a-changin'. A new government came to power. they want “build, build, build”. The promise was levels of housing construction more reminiscent of when Bob Dylan still played acoustic! The 300,000 new homes per year being discussed would represent a 50% increase over current levels. To achieve that goal, the private sector must participate.
So how did Persimmon stock react to the news? Well, at least at first, very good. Shares are up 28% from the election date through October, a strong sign of optimism around the company. Then came the Budget and the price fell by 28%, close to where it languishes now. The budget was not a great help for Persimmon. Rather, it wiped more than a billion pounds off its market value!
So it went up and down by the same amount in percentage terms? It's annoying for us Persimmon shareholders, isn't it? Well, it's even worse than that! The 28% increase was due to lower participation than the 28% decrease. That's why Persimmon shares are worth even less now. A £1,000 stake before the election is worth about £922 now.
What is the core of the problem? CEO Dean Finch says he is looking at a “contraction period”. According to him, negotiations with suppliers have already given signs of higher inflation. The main causes are likely to be an increase in the minimum wage and NI of employers throughout the supply chain. Of course, those tax increases will also have a direct effect on Persimmon's margins.
Am I selling?
There's a triple whammy here too, and it comes in the form of stricter regulation. From next year, all new-build homes will have to stop using gas boilers as part of Net Zero targets to eliminate them completely by 2035. That means builders will choose more expensive alternatives. It could even mean fewer building completions if certain projects prove unprofitable.
Although not everything is bad. The company delivered a positive business update with increases in a number of metrics. Visitor inquiries and other “soft” metrics also remained strong, a good sign of positive momentum and where sales will be headed in the coming years. While it hasn't been a particularly fantastic few months for Persimmon, I don't need to think twice about what I'm doing with my shares. For me it is not a sale.
