This report is an updated version of the report published on 10 June 2022 at 08:13 AM GMT+1

Persimmon PLC (LON: PSN)

Persimmon PLC 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.

On 07 July 2022, PSN expects to release a trading update.

Investment Rationale for Valuation – Buy at GBX 2,193.00

• Strong House Price Dynamics: Surging inflation is pumping the UK housing prices. Moreover, the market is still in great shape as supply is tight and borrowing costs remained relatively low despite the recent rate increase by the Bank of England.
• Attractive Dividend Yield: PSN has a plenty of long-term potential given its more than 10% dividend yield to mitigate the ongoing market volatility. For FY22 also, it decided to re-iterate its intention to return 235 pence per share in 2022. The first dividend payment of 125 pence per share was made on 01 April 2022, while the second payment of 110 pence per share will be made on 08 July 2022, with an ex-dividend date of 16 June 2022.
• Vertical Integration: The vertical integration through Brickworks, Tileworks and Space4 manufacturing facilities will mitigate the risk related to supply chain disruptions to a larger extent.
• Decent Fundamentals: PSN reported a significant progress in revenue, profit before tax, and cash position in FY21, compared to FY20.
• Bright Prospects: PSN has kickstarted its FY22 with a positive momentum reflected by a strong current forward sales position significantly ahead of 2019 levels. The Company focuses on mitigating financial risk and continues to make lucrative capital investments by acquiring high-quality land to cater to the housing needs across a wide range of clients. PSN has anticipated delivering volume growth ranging from 4% to 7% for FY22 when compared with 2021 levels. In a nutshell, PSN has a long-term strategy to generate superior returns for the stakeholders by offering high-quality homes at attractive prices.
• Technical Indication: PSN’s current stock price sustained above 20-day EMA and MACD line has given a bullish crossover against the signal line, reflecting a positive price potential.

Key Risks

• House Price Slowdown: British house prices topped GBP 250,000 in April 2022; however, the pace of price growth is slowed down. Moreover, the soaring inflation rates and the rising cost of debt can gradually impact the inflated house prices.
• Macroeconomic Uncertainties: The resurgence in Covid-19 cases and fresh restrictions in China, the US dollar hitting two-decade peaks, persistent inflation, and subdued economic forecasts can continue to impact corporate profits and put pressure on equity markets.

Trading Update (for the period from 1 January 2022 to 27 April 2022, as of 27 April 2022)

• Decent Trading Performance: PSN had demonstrated a decent trading performance illustrated by a 2% year on year growth in private average sales rates during the period and robust forward order book of £2.8 billion as of 27 April 2022.
• Strong Balance Sheet: The Company has £446 million of cash as of 22 April 2022, with deferred land commitments of approximately £160 million to the end of FY22.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

*Peers: Cairn Homes PLC, Travis Perkins PLC, and Stelrad Group PLC.

*All selected peers are LSE-listed Companies from the Home Construction sector.

Conclusion

Based on the decent fundamentals, positive outlook, strong industry dynamics and support from the valuation as done using the above method, we have given a “Buy” recommendation on Persimmon PLC at the closing market price of GBX 2,193.00 (as of 9 June 2022) with lower double-digit upside potential based on 9.85x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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