Persimmon PLC

Persimmon PLC (PSN) is a British leading housebuilder and designs, which develops and builds residential houses, ranging from studio apartments to executive-style family homes. The company has 31 regional offices in the UK, and it trades under brands such as Charles Church, Persimmon Homes and Westbury Partnerships across England, Wales and Scotland.

H1 FY2019 Trading Update (as on 4^th July 2019)
In H1 FY19, good initial progress on improving consumer satisfaction. Build rate remains robust with new home inventories surged by 19 per cent year on year at period end. Consumer satisfaction rating improved in the first seven months of the new Home Builders Federation (HBF) Survey period. In July, a new customer retention scheme being introduced, with coverage extended to comprise any faults identified during the first week of occupation.

Total revenue stood at £1.754 billion, a decrease from the corresponding period of the last year data. Legal completions were 7,584, due to the outcome of the customer service initiatives and later sales releases, which declined average active sites by 8 per cent in H1 FY19. Average selling price stood at £216,950. Anticipate underlying housing operating margin of 30.8 per cent for the financial year 2018 to be a reasonable guide for H1 2019.

Financial Highlights (FY2018, £ million)

(Source: Annual report, Company Website)

Total group’s revenue for the year increased by 3.89 per cent to £3.74 billion, driven by an increase in legal completions which grew by 406 new homes in 2018 to 16,449. Group’s gross profit stood at £1,179.9 million in FY 2018 as compared to £1,071.7 million in FY 2017. Group’s operating profit surged to £1.083 billion, an increase of 13%, while underlying new housing operating margin increased to 30.8%, reflecting a 260bps increase. Group’s reported PBT increased by 13% in FY 2018 to £1.091 billion from £0.966 billion in FY 2017. Total Net Income (including other comprehensive income) in FY 2018 stood at £902.8 million as compared to £805.3 million in FY 2017. The company’s basic EPS increased by 11% to 283.3 pence in FY 2018 from 255.0 pence in FY 2017. The company’s Diluted EPS stood at 280.8 pence in FY 2018 from 243.1 pence in FY 2017.

Share Price Performance

Daily Chart as at July-04-19, before the market closed (Source: Thomson Reuters)

On 4th July 2019, at the time of writing (before the market close, GMT 12:38 PM), PSN shares were trading at GBX 1,988 and increased by 0.025% against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,551/GBX 1,824.70. The company’s stock beta stood at 0.91, reflecting lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
In the UK housing market, affordability is a key factor influencing housing demand.Increased demand has resulted in house prices rising at a rate above that of retail price inflation. However, given the low mortgage rate backdrop, mortgage cost to income ratios remained below the peak levels seen in 2007. In April 2019, the average UK house price stood at £228,903.

The “Help to Buy” scheme, which is stated to be in place till 2023, has helped the company in posting strong results, while company’s focus on low to the mid housing market and in North England helps it to cushion the blow from Brexit-related effects on the property market. Despite the current trading levels, which indicate the stock on the lower side, but the company has shown steady growth in its financials.

Based on the strong financials which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 1,987.50 (as on 3rd July 2019) with lower double-digit upside potential based 7.90x NTM Price/Earnings multiple (approx.) on FY19E earnings per share (approx.).

MJ Gleeson PLC

MJ Gleeson PLC (GLE) is a United Kingdom-based company, which is involved in providing two businesses: strategic land trading, mainly in the South of England and house building on brownfield land in the North of England. The company’s business is differentiated in two segments: Gleeson Homes and Gleeson Strategic Land. The Company has operations in various regions, such as Greater Manchester; Lancashire; South Yorkshire; County Durham; North Yorkshire; Cleveland; Merseyside; Nottinghamshire; Derbyshire; Northumberland; Tyne & Wear, and West Yorkshire.

Trading Updates (as on 4^th July 2019)
In Gleeson Homes, annual volume increased by 25 per cent to 1,529 homes as compared with the previous year of 1,225. At 30^th June 2019, the land pipeline of owned and conditionally purchased plots surged by 5.6 per cent against the previous year-end, totalling 13,575 plots, of which 7,050 plots have been obtained, subject to planning permission. There are a further 473 plots which would be acquired.  During the upcoming year, this segment had currently anticipated a surge to 80 or more sites and active on 69 sites.

In Gleeson Strategic Land segment, the company had sold 9 land interests with the possibility to deliver 1,755 plots for housing development. Planning of 9 sites had the potential to deliver 2,929 plots for housing development. Development was projected on a further six sites. The portfolio includes 60 sites which could deliver 44 acres of commercial land and 21,730 plots.

The company’s cash balances decreased to £30.3 million as compared to £41.3 million on June 30, 2018.

Recent News
On 10^th June 2019, the company announced that Jolyon Harrison, Chief Executive Officer, had stepped down and left the group with immediate effect.

On 2^nd May 2019,the company had entered into a purchase contract for 9.9 net developable acres of land in Cumbria, for a total cash consideration of £1.2 million.

Financial Highlights (H1 FY2019, £ million)

(Source: Interim Report, Company Website)

The company’s revenue increased by 52.8 per cent to £118.3 millionas compared to £77.4 million in H1 FY18, due to the increase in Gleeson Homes division and Gleeson Strategic Land segment. The profit before tax rose by 62.8 per cent to £22.3 million against the £13.7 million in H1 FY18. The cash balances surged by 4.1 per cent to £27.8 million as compared with the corresponding period of the last year. Return on capital employed (ROCE) climbed by 350bps to 29.5 per cent as compared to 26 per cent in H1 FY18. Earnings per share rose to 61.2 per cent to 33.2 pence as compared with the previous year same period data. The board declared the interim dividend per share of 11.5 pence, an increase of 27.8 per cent against the 9 pence in H1 FY18.

Unit sales surged by 16.5 per cent to 691 unitsas compared to 593 units in H1 FY18. Average selling price was up by 2.4 per cent to £127,400 as compared with the corresponding period of the last year data. Land pipeline stood at 12,966 plots.

Share Price Performance

Daily Chart as at July-04-19, before the market closed (Source: Thomson Reuters)

On 4th July 2019, at the time of writing (before the market close, GMT 2:28 PM), GLE shares were trading at GBX 780 and increased by 5.691% against the previous day closing price. Stock's 52 weeks High and Low is GBX 900/GBX 600. The company’s stock beta stood at 0.11, reflecting lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company has once again delivered a good performance with decent operating profit in both divisions.The Gleeson Homes division is comfortably on track towards achieving its stated target of doubling volumes to 2,000 new homes per year by 2022.

The homes continue to remain highly affordable despite the recent surge in bank rates and mortgage finance remains readily available. The uplift in dividend signals the confidence in continued cash generative growth.

Based on decent financials which are supported by valuation done using the above method, we have given a “SPECULATIVE BUY” recommendation at the closing price of GBX 738 (as on 3rd July 2019) with single-digit upside potential based 1.78x NTM EV/Sales (approx.) on FY19E sales (approx.).

* All estimates have been taken from Thomson Reuters.
*The “Speculative Buy or Buy” recommendation is also valid for the current price as covered in the report (as on July-04-19).

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