Sector: Household Goods Home Construction Last Close: 436p
Market Cap: £1.3bn 12 Month Closing Price Range: 336.5p/507.5p
Company Overview
Persimmon is the UK’s largest listed housebuilder within the UK. The business operates under three main brands, Persimmon Homes, Charles Church and Westbury Partnerships.
The Persimmon Homes business is the core operation, building quality homes which provide the very best in design, construction and service. The wide range of property types includes three, four and five-bed detached properties; two and three-bed terraced and semi-detached houses; bungalows and apartments.
Charles Church provides a range of both modern and traditional, premium homes. It is one of the UK’s foremost house building brands with an excellent reputation for the design and quality of the homes it builds.
The Westbury Partnerships business focuses on social housing, in conjunction with Space4, the group’s timber frame manufacturing operation. Working closely with Housing Associations, Westbury offers solutions to some of the Government’s affordable housing problems. Persimmon Partnerships Scotland has built quality, affordable homes for a wide range of customers since 2001.
Technicals
Following a period of around 7 months of weakness, the shares have now completed a base pattern which suggests further upside will be seen. A move above 415p completed the pattern and implies a target of 494p. On completing the pattern the shares witnessed a pullback towards the neckline. The pullback bullishly found support above the 200 day moving average (currently c. 394p) which suggests the long term outlook is certainly improving now, while other moving averages are also advancing. Momentum indicators such as the RSI, MACD and Stochastics are in positive configuration. Also the relative strength has broken a 17 month downtrend to suggest that the shares are beginning to outperform again. Expect the shares to push towards the 494p target, while the key resistance around 520p could also be tested.
A move below the 200 day moving average would be disappointing now, however the base pattern remains intact until a move below support at 380p.
Fundamental Data
Prospective 2011 P/E Ratio : 15.7x
Prospective Earnings Growth : 27%
Prospective 2011 Dividend Yield :1.9%
Dividend cover : 3.4x
Fundamentals/News flow
The August interim results were better than expected and well received by the market. While marking a key low in the shares, the confidence of the board to restore the dividend is a strong indicator. The board’s strategy to combat the struggling UK housing market has been to concentrate on cash generation, which is enabling the board to reduce the level of debt and strengthen the balance sheet. Paying down debt reduces interest costs, which were c. £25m in H1 out of £61m of adjusted EBIT. Lowering interest costs means the profits filter more easily through the PL to improve earnings, while also helping to strengthen the balance sheet. The board has also reviewed the business process which is controlling costs and is also helping to rebuilding the EBIT margin. With a significant reduction in net debt to £51m (FY2009: £268m) coupled with the FY turnover growth (up 10% on FY2009 turnover) announced in the recent trading update this has enabled a significant increase in underlying profit before tax and subsequently FY results will come in at the top end of expectations. Although the winter weather reduced the level of sales activity, with pricing remaining stable margins on forward sales have been maintained which is positive. The board expects house prices to remain static during 2011 which will mean that continuing its strategy will be positive for Persimmon over the coming year.
On prospective December 2011 estimates the shares currently trade on c. 15.7x earnings, which still looks undemanding considering the strength of the recovery potential in earnings. NAV per share continues to climb, up to c. 565p at the interim stage and should be even higher at the FY stage as the board continues to reduce debt and acquire new land (5,000 plots acquired in H2). The shares are also forecast to yield 1.8% for December 2011 (very respectable within the Home Construction subsector ranking 2nd out of 7) with a dividend that is forecast to grow over 20%.
Analysts are positive on Persimmon with the market consensus rating the shares as a buy and recent broker comments have been encouraging. Analysts are encouraged by the turnover growth, margin recovery and cash generation, with Citigroup suggesting that in the wake of the better than expected trading update there are likely to be some upgrades to consensus estimates. There are 9 brokers that have a buy recommendation out of a total of 14, with 2 at Neutral and 3 Sells.
Caveats/Weaknesses
• Positivity surrounding the shares of Persimmon could be based on the expectation of at least a static housing market in 2011. If the market were to fall again then the revenues and profits would suffer.
• The near term performance of Persimmon could be dependent on how the Spring selling season goes. If it does not go well the positive sentiment behind the story could be lost.
Consensus of Broker Recommendations
Conclusion
The base pattern targets well over 10% upside while a move to 520p (c. 18%) could be easily seen. The strong control of the business, with strong cash flow, reduction of debt and control of margins suggest strong management, while the undemanding valuation should result in some upside. Persimmon is a good late cyclical recovery company to Buy Hold.
While fundamental and technical analysis underscores our recommendation, there are always risks to the downside. In the current market environment, markets and shares can turn in the opposite direction to that indicated by fundamental and technical analysis.
This report was written by Richard Perry – Chief Market Strategist at Central Markets www.centralmarkets.co.uk The writer does not hold a position in the company featured, but client accounts may. The material in this report has come from the company’s corporate website and Alpha Terminal.