Persimmon PLC (LON: PSN) - Strong order book and a good start for H2 FY2020

Persimmon is a UK based FTSE-100 listed company that is into home building. The Company is headquartered in York, and it operates under the brand names that include Persimmon Homes, Charles Church and Westbury Partnerships. FibreNest is the broadband service to homes. The Company has 31 regional housebuilding offices in the UK, and it has the capacity to build 20,000 new homes per annum. The average house price ranges between £40,000 to £900,000. Out of the total homes sold, about 50% are sold to the first time buyers at an average selling price lower than the UK’s average housing price.

Persimmon will release a trading update on 10 November 2020.

Strategic Objectives of Persimmon

 (Source: Company website)

Growth Prospects and Risk Assessment

Persimmon has a strong infrastructure that would support growth opportunities. It has 31 operating companies that would help in increasing the output in the event of increased demand. It has a land bank of approximately 15,900 acres, and thus it has a capacity to deliver more than 100,000 homes. The Company has the capacity to deploy more cash if it sees more growth opportunities. It manages the cash cycle in a skilful manner as it has the strength of the landbank and gives it an option to choose when to buy more land. Persimmon owns 89,232 plots in total, which represents a forward supply of 5.6 years. Close to 29,300 plots are held under an option that is proceeding through planning, and around 14,500 plots are controlled and allocated in local plans, which gives visibility of close to 133,000 plots.

The Company sells a large number of homes to the first time buyers and the buying criteria for the first time home buyers is very supportive in the UK, which could pent-up demand.

However, factors that can deter the growth of the Company include an increase in mortgage rates. A no-trade Brexit would create a scenario of uncertainty for the Company. The pandemic has cost the loss of jobs of many people, and an increase in unemployment and low economic growth can lead to low sales of houses. The UK government has currently supported the housing market up to a great extent, and once the government rolls-back the support, it can impact the business of Persimmon.

Industry Outlook Dynamics

The UK housing market has performed strongly in 2020, during the lockdown, many industry experts believed that the housing market would slide downwards, but it has performed strongly. The housing market growth slowed since the mid-2016, and it has picked up this year. The UK government is encouraging first-time buyers to make a home purchase, and decisions taken by the UK government has supported the housing prices. Under some processes, the first time buyers can get a 95% loan to value (LTV). The UK government has also waived off the stamp duty for house purchases until March 2021.

The mortgage approvals in the UK increased to 91,450 in September 2020, which was the highest since 2008. As reported on 21 October 2020, the UK average house prices increased by 2.5% year on year in August 2020. The average UK house price was at the summit of £239,196 in August 2020. The housing market is expected to remain buoyant in the short-run as it is supported by the government’s policies.

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

A Glimpse of Business Segments

(Source: Company Website) 

Recent News

On 27 October 2020: the Company stated that it had admitted 60,000 ordinary shares of 10 pence each in the Company.

On 16 October 2020: Persimmon announced that it granted an option (on 15 October 2020) to purchase ordinary shares in the Company to the Group’s Finance Director (Mike Killoran). The option will normally be exercisable from 1 December 2023 to 31 May 2024. 

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 sentiment. It had an approximately £1.4 billion forward order book at the start of the year 2020 and its first 11 weeks of sales witnessed an approximately 10% increase on the average private sales rate per site as compared with the same period in 2019.
• Led by the onset of the Covid-19 pandemic, the Company has shown a 35% reduction in new home legal completions in H1 FY20 as compared with the last year.
• 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 underpin 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 land holdings totalled 89,232 plots.
• Persimmon has a strong platform moving into H2 FY20, with excellent levels of forward build, an experienced and agile management team, solid average weekly private sales rates and a healthy forward order book.
• The Company paid an interim dividend of 40 pence per share amid challenging times.

Operational Highlights (H1 FY20)

• 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 throughtout 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.
• It has invested more than £675 million in local communities, with a strong work in progress position.
• Persimmon has appointed Dean Finch as the new CEO from 28 September 2020. 

Share Price Performance Analysis

On 2 November 2020, at the time of writing (before the market close, at 8:23 AM GMT), Persimmon Plc shares were trading at GBX 2,253.81, down by 3.52% against the previous day closing price. Stock 52-week High was GBX 3,328.00 and Low of GBX 1,367.50, respectively. From a technical standpoint, we could see a positive movement in the share price based on the 50-day RSI (41.3).

Based on 6-months performance, PSN has delivered a better return than the FTSE All-Share Household Goods Index and FTSE-100 index. PSN generated a return of around 3.5%, whereas FTSE All-Share Household Goods Index return was -2.3% and FTSE-100 return was -3.4%.

From the technical standpoint, 14-day RSI is currently supporting an upside move (around 32.07 level – oversold zone), which means the stock price could increase in the short term. The Company’s stock has delivered a positive return of around 5% in the last six months.

In the last five years, Persimmon Plc share price has delivered ~17.15% return as compared to negative 12.32% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

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

Business Outlook Scenario

Persimmon has a forward order book of around £2.5 billion, which was up by 21% year on year at the start of H2 FY20. Since the start of July 2020, the average weekly sales price per site has improved by around 49% year on year. The build rate in H1 FY20 was strong, and similarly, the Company expects to have a strong build rate in the second half. The short-term outlook of the Company remains favourable, given the strong order book position. Persimmon has appointed Dean Finch as the new CEO from 28 September 2020 who has replaced David Jenkinson. Over the last five years, the revenue has grown at a CAGR of around 5.9% between 2015 and 2019. The Company has high quality of land holdings that would support the future margins.

Considering the robust first-half performance, strong balance sheet, high-quality of land holdings at 30 June 2020, decent profitability margins, 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 2,253.81 (as on 2 November 2020, before the market close at 8:23 AM GMT), with lower-double digit upside potential based on 12.21x Price/NTM Earnings (approx.) on FY20E 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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