In a trading update ahead of its annual shareholder meeting on Wednesday, the FTSE 100 builder maintained that the new-build housing market was proving “resilient” and current forward sales position were “strong”, with level of customer visits, sales conversion rates and cancellation rates all running in line with in-house expectations.
However, forward-sales revenue including legal completions was down 3.6% to £2.7bn so far in 2019, with active sales outlets down to 350 from 375 this time last year and the weekly private sales rate per site 5% lower. House prices have remained robust, with the average private sale on the forward order book climbing to around £237,850 from £236,500.
Over the last few years, Persimmon has been dogged by complaints about its poor build quality, punitive leasehold terms and excessive executive bonus scheme, leading to recent reports that it could be stripped of its right to take part in the government’s lucrative Help to Buy scheme. A new BBC investigation this week has also revealed houses developed by Persimmon - and rival Bellway - have been sold with incorrectly installed or missing fire barriers.
As a result, the group has been working on a range of ways to improve its customer satisfaction levels, including a “more targeted approach” to site sales, together with investment in the customer care team, operations and technology. To make its moving-in dates more accurate, the company will release new homes to market at a later stage of development and recently began to offer buyers the right to withhold 1.5% of the selling price as a ‘retention’.
While the number of sales reservations has dropped since the start of the year, these sites are predicted to make “a good contribution” to sales once building has progressed and homes are released for sale, with the board currently anticipating a flat level of legal completions in the first half.
“The initiatives are already beginning to make an impact and we are confident they will deliver significant improvement once they have had time to take full effect,” Persimmon said. An independent review was commission last month to assess the effectiveness of the new measures and will present the results in the final quarter of the year.
Overall costs, including the investment in customer services, are still expected to increase by close to 4% for the year, even with the brick manufacturing factory producing at “close to optimal capacity” and a new roof tile manufacturing facility expected to be commissioned and commence begin deliveries during the second half of this year. Acquisition of new land are being made in a “very selective” manner.
Persimmon shares fell more than 2% in early trade but after two hours were almost flat at 2,222p.
With the lower sales rate and active sites down 6.5%, Shore Capital analyst Robin Hardy said that guidance for flat legal completions "stacks up but does raise the risk that sales will edge down. We are modelling flat sales."
Hardy said the key investor concern over the risk of a permanent rise in costs because of the drive to improve build quality and the ‘customer journey’, reckoning the 1.5% ‘retention’ offer is likely to become permanent, with a risk that this ends up costing more than the 1.5% and hitting margins.
Russ Mould, investment director at AJ Bell, said the update "doesn’t look great", especially with rising costs and stagnant house prices implying pressure on margins just as the BBC prob casts as negative light on the company.
“The response could well include spending more to improve the quality of its homes which could have a further impact on profitability,” Mould said. “Though if such action puts the business on a more sustainable footing, it could ultimately be a price worth paying. Shareholders should learn more by the final quarter of 2019.”
-- Adds share price, BBC probe, broker comments --