Shares in York-based house builder Persimmon took a drubbing in the second half of 2018 amid worries that UK house prices had perhaps peaked and that weak consumer confidence, lofty prices and the Bank of England‘s second interest rate increase of the cycle would all start to weigh on the demand for housing.
However Persimmon shares have been enjoying something of a rally in recent weeks despite the gloom hovering over UK housing. Shares were up from 1859 on 17 December to a close last Friday of 2203. The momentum behind Persimmon stock seems to indicate that there is still more to come, with a target price of 2400 not unrealistic.
Persimmon shares rally as Fairburn steps down
The UK government has done its best by extending the Help to Buy scheme out to 2023 and rather than trying to justify the structure of its bonus scheme following the departure of CEO Jeff Fairburn on 31 December, Persimmon will be looking to focus on fundamentals. Group managing director David Jenkinson is going to be taking over control on an interim basis.
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Persimmon completed 16,043 homes in 2017, which was just below the pre-financial crisis peak of 16,701, which Persimmon reached in 2006. Average selling prices reached a record of £213,000 in 2017, compared to the last peak of £190,00, which was achieved in 2007. These are the lowest of the major quoted house builders, due to Persimmon’s geographic focus in the north of England. Over half of the plots which Persimmon has been working on are located in the north of England.
Persimmon ended 2017 with an order book worth £1.4 billion. Management of the company is expected to give a steer on the year’s outcome relative to the analysts’ consensus forecast, which calls for an 11% increase in pre-tax profit to just under £1.1 billion.
The Fairburn Curse
Fairburn and Persimmon had been taking a lot of flak following the award of a £75 million bonus to the CEO and its long term incentive plan for senior executives. Fairburn was finally forced out as the company came to the realisation that he was simply too controversial to leave in place, and that the share price was suffering.
Persimmon was also attacked by MPs, including Vince Cable, who argued the profits linked to the Fairburn bonus came as a consequence of government subsidies. Fairburn had said that he would donate some of his £75 million to charity, but according to The Guardian’s Rupert Neate, as of 21 December last year, that had yet to happen.
What Fairburn’s departure does do is re-establish some investor confidence in Persimmon’s ability to usher in a new era of construction for the lower end of the market. With investors already buying back into the company ahead of Fairburn’s departure in December, we are now cautiously optimistic about its prospects.