Review hammers home problems with Persimmon

13-01-2020

Housebuilders are enjoying their usual new year boost – and the Tory election win – but this could all turn out to have shaky foundations

At this point last year, housebuilder Persimmon had just started its most ambitious rebuilding project – constructing a new reputation for itself following the furore over former chief executive Jeff Fairburn trousering a £75m pay packet.

It all appeared to be working nicely, with the City set to finally be talking about Persimmon as a builder again – until last month, when the company published the results of an independent review it had commissioned on its past failings. If the board was hoping this might draw a line under events, there may be some rather dispirited directors in Persimmon’s boardroom.

A litany of failings found by the review showed that, across the country, the company had been building shoddy, and possibly unsafe, homes. Persimmon said it was putting its house in order, but the report concluded that if directors wanted the firm to be “a builder of quality homes” they “should reconsider Persimmon’s purpose and ambition”. This effectively confirmed what critics had long suspected: Persimmon was more interested in building fortunes for directors than homes for customers.

This will inevitably get a run-out in the City this week as we enter a crucial part of the financial calendar for housebuilders. Persimmon, along with rivals Taylor Wimpey and Bovis Homes (now Vistry Group), will all be delivering trading statements – and it’s not a bad time to be trying to start afresh (again).

Shares in housebuilders tend to rise between January and March, when the news flow is skewed towards the all-important spring selling season. That, in turn, focuses investors’ attention, and helps companies find buyers for both houses and shares.

All eight builders in the FTSE 350 – Barratt Developments, Bellway, Berkeley Group, Crest Nicholson, Persimmon, Redrow, Taylor Wimpey and Vistry – outperformed the index in the first three months of last year. In fact, in only seven of the past 40 years has the sector as a whole failed to deliver positive first-quarter returns for shareholders. Buying these shares in January, City wags say, is as safe as houses.

This January the builders again look to be in reasonable fettle – at least in terms of potential stock market returns. Last week, Persimmon and Taylor Wimpey were among the top stock picks from analysts at Berenberg, who said the sector was “open for business again” following the Tory win in December’s general election. It is a view largely shared across the Square Mile.

Nicholas Hyett of Hargreaves Lansdown said: “[Persimmon] has previously stressed the resilience of the UK economy and housing market in the face of political uncertainty. A government with a convincing majority has stabled the ship a bit, with Persimmon shares jumping 12% after the election. But questions remain over future trade deals, and we’ll be interested to see whether the group has seen an improvement in the short time since.”

Meanwhile, with regard to Persimmon’s rival Taylor Wimpey, analysts at stockbroker AJ Bell commented: “Shares have done very well over the past 12 months, buoyed by its huge dividend yield, persistently low interest rates and hopes that a Boris Johnson-led Tory government will act to support the housing market, perhaps in the form of lower stamp duty.

“The firm’s performance should provide some insight into the UK’s housing market and economy, and from a stock market perspective it is currently the second highest-yielding stock in the FTSE 100 … trailing only Imperial Brands.”

All of which makes the sector seem ridiculously easy to make money from. But, unless you’re a director of one of these firms, it’s not quite as simple as that.

Just take last year’s first quarter, when all the FTSE 350 housebuilders enjoyed their traditional share price bounce. By the second quarter, though, it was different story: they all underperformed the index and, in share price terms, the roof fell in.

Source: The Guardian