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Stock Watch: Persimmon

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

You might think investing in a housebuilder would be - well, as safe as houses - but questions have to be answered when shoddy workmanship and an executive pay row show-up deep structural cracks.

Shares in Persimmon (PSN), the UK’s largest housebuilder in terms of market value, dived when it emerged last month that an overhaul of its culture was needed, along with an improvement in the quality of the homes it builds and a rethink of its executive bonus scheme.

An independent review of its practices, prompted by a series of complaints about the quality of its building work identified a number of issues ranging from insufficient fire protection to a lack of consistent building standards, and promptly saw its shares fall more than 3%.

“There is a need for a fundamental change in Persimmon’s culture to ensure that quality of build and customer service are central to its approach to business and its corporate identity,” the report said.

Adding: “Persimmon cannot afford the stigma of a corporate culture which results in poor workmanship and a potentially unsafe product.”

Persimmon - and indeed many of its competitors - have enjoyed a number of bumper years of late, with the government-supported Help to Buy scheme bolstering profits and share prices across the sector.

The task at hand now is for it to show that it isn’t focusing on profits at the expense of quality.

Because, unlike those unfortunate new home buyers, who no doubt rue the day they bought a Persimmon home, its shareholders have had no such gripes. Throughout the pay scandal, which goes back to 2017 and the more recent criticism of the quality of its homes, the housebuilder’s share price has remained buoyant.

Even that 3% slide, after the report was published in mid-December, failed to do much real damage. The shares which started 2019 around the £20.40 mark are today trading at over £27.

When it comes to business there’s no reason why that upward trend shouldn’t continue, especially with house sales expected to remain brisk. All 2019 stock has been sold and there are around £950 million-worth of forward sales for 2020 already in the bag. But Persimmon has work to do if it wants to rebuild its reputation.

An update is due on Wednesday, and as long as quality remains a focus and the company follows through with good customer service, then brokers are right to be firm buyers of the stock.

Canaccord Genuity has just raised its price target to £30. Trailing slightly behind are fellow brokers Liberum Capital with a price target of £29.50, HSBC on £28.30 and UBS with a price target of £26.70.

Five year performance

(%) As at 9 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Persimmon Plc 36.5 2.7 48.6 -15.3 44.5

Past performance is not a reliable indicator of future returns

Source: FE, as at 09.01.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Past performance is not a reliable indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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