CORRECTION: This article has been amended to better reflect that Persimmon has postponed its annual final dividend, rather than cancelled it.
Buying, selling, and building houses has ground to a halt. Housebuilders such as Persimmon (LSE:PSN), Barratt Developments, and Taylor Wimpey have all closed down show homes and sales offices and ceased operating construction sites.
Persimmon, like its rivals, lost a hefty chunk of share price value when the market crashed. Persimmon saw over 40% of its share price value disappear. The York-based housebuilder operates 31 regional offices around the UK, and employs close to 5,000 people.
Some potential investors see a chunk of share price being lost and begin to rub their hands together. They assume share price levels will bounce back. In this case, however, I would exercise caution. The housing market and construction sector will need time, patience, and demand to recover sufficiently.
Not so open house
Like a lot of other companies, Persimmon provided a trading update in regards to Covid-19. Pointing towards a strong order book leading into the period of uncertainty, it confirmed contingency plans.
Persimmon confirmed it expected a delay in timing of legal completions as well as a rise in cancellation rates. It also expects a material slowdown in new sales, the extent and duration of which is uncertain. That last part is what worries me the most. How long exactly will the lockdown and resulting effects hinder the housebuilder?
Conserving cash and maximising financial flexibility is the order of the day. The cancellation and postponement of its two dividends is a wise move in my opinion. The interim dividend for surplus capital has been cancelled whereas the final annual dividend has been postponed until further notice.
Persimmon did confirm it has a cash position of over £600m. This should go some way to cover its financial obligations in such an uncertain time.
What I would do now
The Persimmon share price stood at near 3,300p in mid-February. At the time of writing it is closer to 1,900p. Some may believe it to be an opportunity to purchase shares cheap. I am not one of those people, at this moment. I must admit it is tempting, however.
With a current price-to-earnings ratio of just under 7 there is not much risk involved here. The previous three years have shown healthy, increasing profit levels year on year. As well as this, the dividend per share has also been increasing. There has also been significant investment into customer service and IT response to better its customer satisfaction ratings.
A major issue for me is the recent controversy around build quality, which was allegedly the reason for CEO David Jenkinson stepping down from his role in February. An independent report commissioned by Persimmon found it did not have an agreed minimum standard for all the homes it builds.
Overall there are some promising takeaways from Persimmon’s position in the market. That said, I do not think it is one for me. Sure it will bounce back in terms of share price, but the big question is how much and when?
With no specific timescales on the lockdown and impact of the virus, this could last months. The knock on effects could last even longer. So it’s a no for me right now. There are other bargains out there in industries still operating.
