Persimmon: Still the pick of the builders?

by Richard Hunter from interactive investor |

As Persimmon puts customers before volume, what will this strategy mean for the housebuilder's shares?

Persimmon (LSE:PSN) has recently suffered from difficulties of its own making, which are now the focus of concerted efforts to rectify.
 
In particular, its quality issues both in terms of build and customer service have been widely reported and criticised. The company has put these matters at the top of its “to do” list and, while there has been an inevitable impact on sales in the intervening period, there are already signs that management has grasped the nettle, which in turn could lead to a rather more comfortable 2020.

Accompanying this reputational rough ride have been a number of earnings downgrades from the market, with most of the key metrics having fallen due to the necessary slowdown as the company gets its house in order.

More broadly, the removal of the Help to Buy scheme, albeit some years off, casts a shadow over the sector, while the UK’s European negotiations may well provide some uncertainty and therefore volatility as the year unfolds.
 
Even so, there remains much in Persimmon’s favour. It has a deep land bank and is determined not to repeat the mistakes leading up to and during the financial crisis, such that the company is now the proud owner of a strong balance sheet, with a particularly cash generative business.

The group’s payment of lofty special dividends in recent times leads to a projected dividend yield of over 8%, a clear bonus to income-seeking investors who have also seen the benefit of recent capital growth.

Meanwhile, despite the shaved revenues reported in this update, Persimmon is maintaining that pre-tax profits will not suffer and will continue to be in line. The company has a strong book of forward sales into this year, which will underpin prospects, while the wider benefits propelling the sector are likely to remain in place for the time being, such as mortgage availability and a low interest rate environment.

The imminence of the Spring selling season should provide another fillip to progress, and the fact that the company has less exposure to London and the South East is representative of its geographic diversification on the UK.
 
Persimmon’s misdemeanours may have tarnished its public reputation temporarily, but has had little effect on the investment community. Indeed, the shares have enjoyed a 26% gain over the last year, as compared to a 10.5% hike for the wider FTSE 100 and have surged 22% in the last three months alone, latterly bolstered by the general Election result.

For the moment, it seems likely that the company will maintain its position as the preferred play in the sector, with the market consensus still standing at a strong buy.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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