Persimmon Plc (LON: PSN): High-quality land holdings & Robust order book.

Persimmon is an FTSE-100 listed company, engaged in the housebuilding business across England, Scotland, and Wales. The Company operates under three brands – Persimmon Homes, Charles Church and Westbury Partnerships. The Company has the capacity to build 20,000 new homes per annum. It has around 31 regional housebuilding offices in the UK. The average house price is ranging between £40,000 and £900,000. The Company is focused on providing homes ranging from studio apartments to family homes.

PSN will provide full-year FY20 results on 03 March 2021.

(Source: Company Website) 

Growth Prospects and Risk Assessment

PSN is rendering its housebuilding services at various price points with its primary focus on first-time buyers. The Group’s average selling price remained 18% lower than the national average in 2019, reflecting the Company’s focus on providing affordable housing. Persimmon had delivered 113,000 new homes across the UK in the last eight years (from 2012 to 2019). The Company had provided 50% of private sales to first-time buyers during 2019. The UK Government remained bullish on the housebuilding industry with an objective to achieve 300,000 new homes by the mid-2020s.

However, the performance can be significantly impacted due to lack of mortgage availability, changes in Government policy, Health & Safety concerns, climate change, cyber risk including data breaching, national and local economic conditions, UK’s exit from the EU. The Group is also exposed to labour & resources risk related to skilled workforce, retention, materials, and land availability.

Industry Outlook Dynamics

The UK housing market has demonstrated resilient performance in 2020. Even during the time of lockdowns, it was well supported by the UK Government as they waived off the stamp duty until March 2021. The average house price had witnessed an annual growth of 2.50% during August 2020 compared to 0.60% annual growth shown during August 2019. The UK house prices had shown a slowdown in the last three years, particularly in the south and the east of England.

According to Halifax, the UK average house price had shown a monthly drop of 0.30% to £252,000 during January 2021 compared to December 2020. With reference to the latest figures from the Bank of England, the number of mortgage approvals was also dropped by 1.80% during December 2020 compared to its prior month.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Persimmon Plc.

Trading Update (ahead of its FY20 results, as on 13 January 2021)

(Source: Company Website)

• Despite the challenges arising from the pandemic, the Company saw a strong trading environment, with a completed sales contract.
• The second half of the year delivered a robust performance with 8,675 new home legal completions.
• During the year, the Company generated total revenues of £3.33 billion, with £3.13 billion of new housing revenues and an increase of around 7% in the average selling price.
• Moreover, Persimmon has improved its average selling price of new homes by 3.7% (which sold to owner-occupiers), while in H2 FY20, the Group's average weekly sales rate per site was 39% higher than the same period last year.
• On 31 December 2020, the forward sales surged by 25% to £1.689 billion as compared with the last year.
• In 2020, the Company witnessed a strong liquidity position and spent around £330 million on land investment, with cash balances of £1,234 million and £300 million of revolving credit facility.
• PSN has a solid track record of managing the housing cycle with disciplined capital investments.

Third Quarter Trading Update (covers the period from 1 July 2020 to 9 November 2020, as on 10 November 2020)

• The Company delivered a strong third-quarter performance, with an increase of 38% YoY in the average private weekly sales rates per site.
• For the period from 1 October 2019, the customer satisfaction score was 89.8%, with the Group trending ahead of the five-star threshold since January 2020.
• The Company saw a strong liquidity position, with a cash balance of approximately £960 million as of 31 October 2020.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 18 August 2020)

(Source: Company Website)

• The Company had a strong start to the year, with improved market sentiments.
• For the first half of 2020, Persimmon ultimately delivered a robust performance, with new housing gross margin of 31.3%.
• Similarly, the Company holds high-quality land holdings which underpins stable future production.
• At the end of June 2020, PSN had strong liquidity with a cash balance of £828.9 million, and its owned and controlled landholdings totalled 89,232 plots.
• In H1 FY20, the Company’s strength, agility and preparedness ensured strong performance in H1 with completions of 4,900 new homes and made decent progress in customer care improvement plan.
• Since the successful launch of Homebuyer Retention Scheme, the Company’s HBF (Home Builders Federation) survey rating throughout 2020 has been trending ahead of the five-star threshold.
• The Company’s internet service provider (FibreNest) is supporting more than 8,000 customers with full-fibre to the home broadband service. 

Financial Ratios

Share Price Performance Analysis

On 08 February 2021, at the time of writing (before the market close, at 8:12 AM GMT), Persimmon Plc shares were trading at GBX 2,758.00, down by 0.25% against the previous day closing price. Stock 52-week High was GBX 3,328.00, and Low was GBX 1,367.50, respectively.

From the technical standpoint, 20-day SMA (2,689.75) and 20-day EMA (2,703.14) support the upside potential.

In the last one year, Persimmon Plc’s stock price has delivered a negative return of ~6.73% return as compared to negative ~10.03% return of FTSE 100 Index and a negative -12.39% return of FTSE All-Share Household Goods index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

In the last six months, Persimmon Plc share price has delivered around 12.96% return as compared to the approximately 6.69% return of FTSE 100 index, which shows that the stock has outperformed the index during the last six months.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

PSN had kickstarted its FY21 with a positive momentum reflected by robust current forward sales position of £1.69 billion as of 31 December 2020. It is focused on mitigating financial risk and continue to make lucrative capital investments by acquiring high-quality land to cater to the housing needs across a wide range of clients. The Group remained focused on strengthening its outlet network as ten sites were under construction, getting ready for the sales release and PSN had plans to open 50 new sites during H1 FY21. The various factors like increasing Covid-19 restrictions, acceleration of Covid-19 vaccination and an end to a stamp duty holiday would have an impact on the sales of the Group. The Company would provide its detailed assessment of the housing market with its FY20 results on 11 March 2021. The Group had a long- term strategy to generate superior return for the stakeholders through its business.

Considering the robust performance, strong liquidity position, sustainable business model, high-quality of land holdings, decent profitability margins, strong customer demand, encouraging sales levels, sturdy signs of progress, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Persimmon at the current price of GBX 2,758.00 (as on 8 February 2021, before the market close at 8:12 AM GMT), with lower-double digit upside potential based on 13.68x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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