Persimmon PLC

Persimmon PLC (LON: PSN) is a FTSE 100 listed Company, which is involved in housebuilding business across England, Scotland, and Wales.

On 9 November 2021, Persimmon has scheduled its next trading update.

Rationale for Valuation – BUY at GBX 2,659.00

• British house prices continued to increase with the easing of travel restrictions, especially in tourist hotspots.
• The average private sales rate for H1 FY21 was over 30% ahead of H1 FY20. There were 85,771 plots owned and under control on 30 June 2021 (December 2020: 84,174), while built rates were maintained at pre-Covid-19 levels.
• Despite the partial end in stamp duty by the government, UK’s house prices rose in August 2021 as the demand for bigger houses, and low interest rates continued to support the prices.
• Consumer confidence is improving with a shrink in the UK employment rate, while the housing market fundamentals continued to remain positive.
• From a technical standpoint, 14-day RSI (~34.15) is in the oversold position, while the stock price is hovering close to the lower Bollinger Band.
• On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Homebuilding & Construction Supplies industry.

Key Risks

• The likelihood of China Evergrande’s debt default risk poses a systematic risk to the financial and real estate markets.
• The anxiety over interest rates increase with a rise in US Treasury Yields can extend sell-off in the short-term.
• As the government started to taper the stamp duty holiday from the June 2021 end, house prices have fallen for the first time in 2021.
• Brexit and resurgence in Covid-19 cases are causing a huge impact on the construction supply chain. Such material shortage can delay projects and cap the expected growth prospects.

Recent News

Finance Director Succession: On 27 July 2021, PSN unveiled that Group Finance Director, Mike Killoran will retire from his position in early 2022 after serving the Company for 25 years.

Half Year report for the 6 months period ended 30 June 2021 (as on 18 August 2021)

 (Source: Company Website)

• Persimmon demonstrated a robust financial performance in H1 FY21 with new housing revenue of £1.75 billion in H1 FY21 (H1 FY20: £1.10 billion) and a profit before tax of £480.1 million (H1 FY20: £292.4 million).
• The after-tax return on equity stood at 22.6% in H1 FY21 (H1 FY20: 21.5%), while the underlying return on average capital employed was 37.9% in H1 FY21 (December 2020: 29.4%).
• For the six months to 30 June 2021, the new housing operating margin was 27.6% against 26.6% in H1 FY20.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Persimmon has demonstrated strong trading performance in H1 FY21 and reaffirmed a positive outlook to create sustainable value. During H1 FY21, Persimmon reported a robust financial performance as the forward sales position is 9% ahead of H1 FY19. It reported forward sales of £2.23 billion at the end of Q2 FY21 while maintaining a healthy liquidity level. The Company also maintained high-quality landholdings, a resilient balance sheet, and disciplined land replacement for sustainable growth. In a nutshell, PSN is well-positioned to manage the industry-wide inflationary pressure. Adjacently, British house prices have rebounded strongly in August 2021 despite phasing out of pandemic-era tax rates. The stock made a 52-week High and Low of GBX 3,272.00 and GBX 2,249.61, respectively.

Based on the high-quality homes, good forward sales, healthy balance sheet, encouraging 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 2,659.00 (as on 29 September 2021), with lower double-digit upside potential based 12.26 Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

Weir Group PLC

Weir Group PLC (LON: WEIR) is a FTSE 100 index listed Company that provides engineering solutions for minerals and mining technology markets.

The ex-dividend date for the interim dividend is 7 October 2021, while the dividend is scheduled for payment on 5 November 2021.

Investment Rationale – BUY at GBX 1,682.00

• On the back of robust demand for sustainable mining technology, orders increased by 17% year-on-year in H1 FY21.
• The balance sheet has been strengthened further as Net debt/EBITDA reduced to 1.6x (on 29 July 2021), following the issuance of US$800 million five-year Sustainability-Linked Notes during H1 FY21.
• The growing project pipeline of Original Equipment and Aftermarket orders, reflects a positive longer-term outlook for mining markets. Subsequently, dividends have been resumed, while the FY21 outlook remained unchanged.
• From a technical standpoint, the momentum oscillator, 14-day RSI (~44.61) indicates an oversold signal, while the stock price is hovering around the lower Bollinger Band.
• In H1 FY21, EBITDA margin and net margin were considerably higher than the industry median of 13.7% and 6.1%, respectively.

Risk Assessments

• The concerns related to cash-strapped China Evergrande Group can reverberate globally and dampen the investors’ sentiments.
• The strengthening of the US Dollar and rising US Treasury Bond Yield can cause exchange rate risk.
• The sluggishness in factory activity with the supply chain disruption and inflationary market conditions can impact the Company's growth prospects.
• The subdued macroeconomic conditions with the prolonged impact of the Covid-19 pandemic could also affect its business sentiments.

Recent News

Chair-Designate Appointed: On 03 September 2021, Weir Group PLC announced that Barbara Jeremiah will succeed Charles Berry (having completed his full nine-year term with the Board) following the Annual General Meeting 2022.

Interim Results (for the period ended 30 June 2021, as on 29 July 2021)

 (Source: Company Website)

• Despite ongoing challenges due to the Covid-19 pandemic, WEIR has delivered a strong performance in H1 FY21.
• As the efficiency programme remained on track, operating margin improved to 15.9% in H1 FY21, reflecting a growth of 120 basis points on H1 FY20.
• The interim dividend was recommended as 11.5 pence per share, representing 33% of adjusted earnings per share in H1 FY21.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

The interim results demonstrated strong order momentum and strategic progress, which led to dividend resumption. As the demand recovered to pre-Covid levels for recurring aftermarket consumables, the order momentum appeared robust. Therefore, the Company expects to report FY21 profits and margins in line with the current market expectations on a constant currency basis. Also, the structural demand for clean energy metals shall create a multi-decade growth opportunity for the business. The resumption of dividends shows confidence in the Company's strategy and future prospects. The stock made a 52-week High and Low of GBX 2,130.00 and GBX 1,223.50, respectively.

Based on the strong order book, solid execution of efficiency programme, strengthened balance sheet, dividend resumption, promising market trends, and favourable valuation conducted above, we have given a “BUY” stance on Weir Group PLC at the closing market price of GBX 1,682.00 (as on 29 September 2021), with lower double-digit upside potential based 26.82x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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

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