Persimmon PLC (LON: PSN) – Good demand for its newly built homes, supported by strong forward sales.

Persimmon PLC is an FTSE 100 Index listed Company founded in 1972 and headquartered in York, the United Kingdom. The Company is engaged in the housebuilding business across England, Scotland and Wales. It also offers broadband services. PSN’s portfolio of brands includes Persimmon Homes, Charles Church and Westbury Partnerships. Under the Persimmon Homes brand, it offers a variety of homes ranging from studio apartments to family homes. Under the Charles Church brand, the Company builds homes in different locations. Under the Westbury Partnerships brand, the Company offers affordable social housing and sells them. The Company is committed to undertaking fire remedial works on affected buildings. 

On 8 July 2021, PSN would release its next trading update.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by PSN from FY2015 to FY2019. In FY2020, PSN paid a total dividend of GBX 110 per share. The last dividend of FY2020 of GBX 70 per share was paid on 14 December 2020. It had an ex-dividend date of 26 November 2020.

In FY2021, PSN so far paid a dividend of GBX 125 per share. It was paid on 26 March 2021. The ex-dividend date for it was 11 March 2021. The dividend was announced on 3 March 2021.

 

Growth Prospects and Risk Assessment

• Recovery in the UK quickens: As the lockdown measures eased in the UK in April 2021, the economic recovery also speed up. Economic output was up 27.6% YoY and 2.3% month-on-month in April. It means the consumers are willing to spend as the UK economy reopens. Hence, it provides an opportunity to PSN in the form of quickly rising demands for its homes.
• High-quality land holdings: The Company has high-quality industry-leading land holdings, and it would invest in the land where there is an evident sign to deliver value. Hence, the land offers a strong platform for growth and underpin future margins.
• Growth potential from off-site manufacturing: PSN secures the supply of key products and materials through vertical integration. Its Space4 business increased site production and delivered thermal efficiency. Hence, it supports growth potential and could increase revenue in future.
• Robust financial platform: PSN has a 24% reduction in deferred land commitments. It also has strong liquidity with cash of £1,234 million as of FY2020, which it could invest in the future growth of its business.
• Sustaining strength through the housing cycle: PSN’s strategy recognizes that the UK housing industry is cyclical. Hence, PSN critically judges the scale and timing and deploys capital accordingly.

Key Risks 

• Labour and resources risk: There are risks due to lack of skilled workforce, retention of the workforce, materials and land availability. This could lead to supply disruptions and delays, which would cause higher costs and lower revenues.
• Mortgage unavailability: If potential customers could not avail of the mortgage at an affordable cost, PSN’s performance could be significantly impacted.
• Disruption in many regions: If the Indian variant of Covid-19 forces the government to extend the lockdown beyond the 21 June 2021 timeline, there could be disruption challenges in many regions in the UK, affecting PSN’s business.
• Climate Change Impact: UK’s transition to a lower-carbon economy could increase regulations, which, in turn, could lead to muted land supply, planning delays, cost overruns and lower access to materials.
• Reputational Risk: Failure in planning and compromise on quality could lead to the damage of PSN’s reputations.
  

Now we will analyze some key fundamental and shareholders statistics of Persimmon PLC.

Trading Update (for the period from 1 January 2021 to 27 April 2021, as of 28 April 2021)

• Driven by pre-Covid build rates, PSN achieved a forward sales position rise of 23% YoY. It is even 11% higher than the 2019 levels.
• PSN has strong liquidity, with cash of £940 million as of 23 April 2021.
• During the period, the average private sales rate was well ahead of 2020 levels, and the customer enquiry levels were also encouraging.
• PSN brought 6,000 plots across 29 locations into its business during this period. Hence, it secured a strong pipeline for the future.

Financial and Operational Highlights (for the year ended 31 December 2020 as of 3 March 2021)

(Source: LSE Website)

• Driven by solid customer demand and good inventory, PSN’s average private weekly sales rate per site was up 12% YoY in FY2020.
• Average selling prices also rose by 6.9%. It was due to the 6.5% increased proportion of homes sold to owner-occupiers during FY2020.
• Despite those positives, PSN’s revenue in FY2020 was down ~8.8% YoY and profit before tax declined by ~24.7% YoY.
• On a positive note, driven by PSN’s cash-accretive operations, cash position in FY2020 rose significantly YoY by ~46.2%.
• PSN delivered 2,212 new homes to Housing Association partners in FY2020. It represented 16% of new homes sold in FY2020.

Financial Ratios (FY2020)

 Share Price Performance Analysis

(Research done by Kalkine Group)

On 11 June 2021, at 7:05 AM GMT, PSN’s shares were trading at GBX 3,044.00, down by 0.46% against the previous day closing price. Stock 52-week High and Low were GBX 3,272.00 and GBX 2,181.00, respectively.

On a weekly chart, PSN's price is sustaining above an upward sloping trend line and currently trading around trend line support level, indicating the possibility of an upward movement. The trend-following indicators 50-period SMA (~GBX 2,757.00) and 21-period SMA (~GBX 2,975.00) trading below the current market price and supporting a positive stance for the stock. The MACD line is also trading above the centreline, however, forming a negative crossover with the signal line. The momentum indicator RSI (14-period) is trading in positive territory at ~42.34 levels.

In the last six months, PSN’s stock price has delivered a decent positive return of ~21.64%. It has outperformed the FTSE All-Share Household Goods and Home Construction index with a return of around 6.44% and the FTSE 100 index with a return of about 7.40%.

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

Business Outlook Scenario

PSN has made a strong start to FY2021 and achieved a forward sales position rise of 23% YoY. It is even 11% higher than the 2019 levels. PSN has also secured a strong pipeline for the future. There are new projects which provide further confidence for FY2021 and beyond. The Company is benefitting from a quicker recovery in the UK, high-quality land holdings, the growth potential from off-site manufacturing, robust financial platform and sustaining strength through the UK housing cycles going into FY2021. PSN has zero leverage, with a debt/equity ratio of 0.00x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help PSN to significantly invest in its new projects, safety measures, brand identity enhancement and customer satisfaction. The Company is also focused on providing broadband connectivity, aligned with the government’s digital strategy. The management also strives to achieve net-zero carbon homes by 2030 and net-zero carbon in operations by 2040.

The Board is confident of future success amid positive long-term fundamentals surrounding the new home market.

Considering the potential bounce-back of the UK economy, decent prospects of the Company, solid demand for its homes, its pipeline of opportunities and customer satisfaction, decent profitability and leverage profile of the business, its high-quality land holdings, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Persimmon Plc at the current price of GBX 3,044.00 (as on 11 June 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 14.48x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

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