The Jeff Fairburn era at Persimmon didn’t properly end when the over-bonused and unabashed chief executive walked away with his ludicrous £75m windfall in 2018. For the housebuilding company itself, good times kept rolling in the form of rising house prices, gentle market conditions and a dividend policy that channelled large sums to shareholders in most years. Even the Covid-related slowdown proved only a brief interruption.
The jig is up now, though. Persimmon’s trading update on Tuesday was the first from the sector to spell out what everybody half-knew already: the market has turned. Even after a halving in the share price this year, though, Persimmon’s cracks were worse than the City had predicted. Cancellation rates have run at 28% in the last six weeks. The weekly sales rate per development scheme, which has been a steady-ish 0.75 in recent years, has plunged to 0.48.
A portion can be blamed on the Truss-Kwarteng mini-budget debacle (“the uniquely disruptive political conditions”, as the company politely put it) but this mostly looks a case of higher mortgage rates entering the system. Average selling prices are down 2% since September.
Persimmon should retain sufficient momentum to meet its 2022 targets, but next year’s outlook was deemed too difficult to predict meaningfully. The only guidance was that completions, selling prices and profit margins will be down. There was also confirmation of the inevitable: the dividend and share buy-back geyser that has been flowing since 2012 will now be diminished. The shares fell another 5%.
To cap it all, Persimmon whacked up its provision for cladding and other remedial works from £75m to £350m, which is one hell of a jump. The scope of the government-sponsored scheme – a response to the Grenfell Tower disaster of 2017 – has widened beyond cladding, but Persimmon has not helped itself by discovering a few affected properties it was previously unaware of. Blame sloppy record-keeping.
Chief executive Dean Finch, looking on the bright side, said there is now “more certainty” over the scope of work required by government. But that’s as far as the certainty extends. The housing market has gone soft even before a recession is confirmed.
“The board views the share buy-back as an investment, rather than simply a return of capital,” says Primark-owning Associated British Foods, slightly pompously. What the directors mean is that they think the shares, which have fallen by a quarter this year, are cheap. So buying £500m-worth out of surplus cash represents better value than handing the money to shareholders via an extra dividend.
Many companies make the same argument in favour of buy-backs, but there are probably two points to note in this case. First, the Weston family that owns 54% of the 87-year-old AB Foods is the definition of a long-term shareholder; George Weston, today’s chief executive, ought to have a decent feel for underlying value by now. Second, this is the first time ABF has opted for a buy-back.
Nothing is certain about valuations, obviously, at least not in the short term. Looking backwards, Tuesday’s full-year pre-tax profits showed a 46% rise to £1.07bn but the outlook is less cheerful. The next inflationary squeeze may be harder to manage. The food, sugar and ingredients businesses feel it in the form of higher energy costs, while Primark gets hit from currencies.
Meanwhile, the retail chain has also taken a £206m hit on the value of its stores in Germany – the shops are too big and profitability “has fallen to an unacceptable level” – and a return to traditional 10%-plus operating margins has been delayed by at least a year to keep hard-pressed shoppers keen in straitened times. Overall, the group predicts lower annual profits next time out.
But over the long term? Yes, one suspects the Westons may be proved right. AB Foods has been around a long time and has been through worse.
Running out of charge
Arrival, a Bicester and London-based based electric van company, used to boast that it achieved the biggest stock market listing for a UK tech company in history. The $13bn event happened, it should be said, in New York. Unpatriotically, Arrival opted for one of those “blank cheque” IPO deals that were all the rage on Wall Street last year.
UK regrets over missing out – and there were plenty at the time – will be tempered by seeing what’s happened to the firm since. Arrival’s valuation is now sub-$500m amid the latest warning about job cuts and the need for more capital. The London market dodged a tech bullet.