The last few years haven’t seen the best environment for UK housebuilders. With low interest rates and concerns surrounding Brexit, house prices and housebuilding have both stagnated. The last thing a company needs is a bad public image or controversy hurting its share price, but this is the exact situation Persimmon (LSE: PSON) has found itself in.
What’s worse, the complaints against the company extended to the houses it builds. A firm may be able to weather a social-controversy storm, but a buoyant share price won’t last long if its products are sub-par.
The complaints
An independent report by barrister Stephanie Barwise, released in December, showed a number of damming aspects for Persimmon. The company was seen to have a ‘box-ticking’ culture with barely any systems in place to inspect work in progress.
Even worse, the report found that some of its buildings had potential fire hazards; specifically that it has a “nationwide problem of missing and/or incorrectly installed cavity barriers in its timber frame properties”. It also noted a short-term cultural outlook, with a focus on buying as much land as possible for quick sales – not on the business of being a housebuilder. Interestingly until this week, these revelations have been mostly ignored by the market, though since last week the share price is down about 12%.
The solution
The company said it has “embraced” the recommendations made in the report and will now begin a process of implementing them. In January it said it expects revenues to fall 2.4%, saying this reflected “the action being taken to ensure the group delivers improved levels of quality and service”.
Persimmon said it still expects pre-tax profits to be in line with the market consensus, slightly lower than those of 2018. One would expect costs associated with a culture overhaul (not to mention improved working practices) to hit the bottom line before the top, so I suspect the true costs of these improvements have yet to show in the company accounts, something investors should be wary of.
One fairly pioneering tool it’s using to help customer retention, as well as “improving the quality and service delivered to our customers”, is allowing buyers of its new-builds the right to hold back 1.5% of its total purchase value to allow for “snagging issues” This has, in fact, been in place since long before the report, and I think in terms of the specifies laid out by Barwise, the markets may need to see a lot more done to assure customers, and of course shareholders.
From the shareholder and potential investor point of view, the company has a history of offering enticing dividend payouts. Normally a good thing, I have always been cautious of such high payouts though (yielding 12% at some stages), and in all honesty often take them as a red flag.
I think Persimmon will be able to get over this report, if and only if, it actually implements real change and removes all doubt in the mind of the customer. For now though, I think there are just far too many uncertainties, not least with the costs of this turnaround, to make Persimmon an appetising investment. I think its shares have some more downside left in them yet.
