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Persimmon feels margin squeeze

The housebuilder has increased the investments in the quality of its homes
August 20, 2019

Efforts to improve the quality of homes and the accuracy of moving-in times unsurprisingly dented Persimmon’s (PSN) underlying new housing margin during the first half of 2019. Combined with flat sales prices, increased customer service spend and annual care costs, the metric fell to 33.8 per cent, from 34.1 per cent during the latter half of 2018.

IC TIP: Sell at 1881p

Margin compression is perhaps an inevitable result of the housebuilder's response to criticism of its building standards, although the top line has also been hit the decision to delay the sales release of new homes.

The continuing slowdown in demand for houses at higher price points isn't helping, either. The volume of sales by the Persimmon brand was 6 per cent lower than the same time last year, as an increase in sales to housing association partners was not enough to offset reduced demand from private buyers. Premium brand Charles Church fared even worse, with home sales down more than a third. However, the group’s land spend was also down a third compared with the prior year and the amount of plots in the land bank was also 4,000 lower at just under 95,100 plots.

Much time is devoted to the structural conditions, such as chronic undersupply and demographics, which underpin the new-build housing market, but that will only boost builders if their end products and post-build services fail to pass muster. Following the quality issues, the group has engaged an independent team of construction quality inspectors to strengthen its current assurance processes across each of its regional businesses.

That represents progress of sorts, but then there’s the question of reputational damage. Before quality issues came to the fore, Persimmon was forced to fend off intensifying investor scrutiny linked to excessive director remuneration, culminating in the departure of former chief executive Jeff Fairburn, the beneficiary of a £75m bonus. His successor Dave Jenkinson, who joined the group in 1997, took control earlier this year, but made the decision not to alter his base rate and eschew any new bonus payments.

Analysts at Peel Hunt forecast adjusted pre-tax profits of £1.09bn and EPS of 284p for the year to December 2019, down from £1.1bn and 286p, respectively, the same time the prior year.

PERSIMMON (PSN)   
ORD PRICE:1,881pMARKET VALUE:£5.99bn
TOUCH:1,880.5-1,882.5p12-MONTH HIGH:2,505pLOW: 1,820p
DIVIDEND YIELD:12.5%PE RATIO:7
NET ASSET VALUE:891pNET CASH:£833m
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20181.84516135nil
20191.75509129nil*
% change-4-1-4-
Ex-div:na   
Payment:na   
*Excludes a 125p a share capital return paid on 29 Mar and a final dividend of 110p a share paid on 2 Jul