A few years ago, all the major housebuilders were trading at a discount to net asset value (NAV). Today, they all command a premium. With the exception of Berkeley Group (BKG), Persimmon (PSN) carries the biggest premium, trading at almost twice net assets. Yet the housebuilder is growing at such a rate and has made such firm commitments to return cash to shareholders that the premium looks justified. Using 2014 forecast earnings, the shares are not expensive on 13 times EPS, which falls to just 10 for 2015.
- Accelerated dividend payout in prospect
- Huge land bank
- Operating margin target reached 18 months early
- Very strong cash flow
- Dear on share price/NAV valuation
- Cost inflation could accelerate
What really sets Persimmon apart from other housebuilders (apart from Berkeley, which is running a similar scheme) is the bumper dividends that it has promised to pay by June 2021. The first 75p a share was announced in June and there is another 545p to come. What's more, while the next payment of 95p was scheduled for June 2015 - the payments are expected to be "lumpy" - there will now be 10p brought forward to June 2014. And given the significant growth in Persimmon's operating cash flow, which was up 38 per cent in the half year at £143m, some analysts reckon this 2014 payment may yet be improved upon, as reflected in our table.
And there seems to be little on the horizon to suggest that the current rate of progress will diminish. With the government's Help to Buy scheme really starting to make a difference, demand for new houses looks set to accelerate. In fact, since the Help to Buy scheme was introduced last April private sale reservations at Persimmon have jumped by 30 per cent from a year earlier, with 1,700 reservations on this scheme secured in the first three months. But there is still a long way to go before regaining the sort of output seen in 2007 - before the financial crash. In that year, completions were just under 16,000 and operating margins 21.8 per cent. Compare that with 2012 when there were 9,903 completions and operating margins were 13 per cent.
| PERSIMMON (PSN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,232p | MARKET VALUE: | £3.75bn | |
| TOUCH: | 1,232-1,233p | 12-MONTH HIGH: | 1,321p | LOW: 694p |
| FORWARD DIVIDEND YIELD: | 6.1% | FORWARD PE RATIO: | 13 | |
| NET ASSET VALUE: | 617p | NET CASH: | £48m | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.57 | 95.5 | 18.8 | 7.5 |
| 2011 | 1.54 | 148 | 36.2 | 10.0 |
| 2012 | 1.72 | 225 | 56.8 | 75.0 |
| 2013* | 1.96 | 295 | 75.1 | 20.0 |
| 2014* | 2.17 | 371 | 95.3 | 75.0 |
| % change | +11 | +26 | +27 | see text |
Normal market size: 3,000 Matched bargain trading Beta: 1.42 *Bank of America Merrill Lynch estimates, underlying PTP and EPS figures | ||||
But the gap is closing quickly, as witnessed by the rise in margins at the June half year to 15.1 per cent, thereby reaching management's margin target 18 months ahead of plan. And analysts at Bank of America Merrill Lynch reckon margins could reach over 19 per cent by 2015. Part of the improvement in profitability reflects a greater use of land acquired after the downturn. Meanwhile, average prices have been creeping up slowly, which is actually not because of price inflation but because of a greater emphasis on building more family homes and fewer apartments. Of course, both positives can only last for so long, but increased output will help to boost revenue. To help achieve this, 90 new sites were opened in the first half of this year, with another 85 planned for the second half. Nevertheless, management has maintained a disciplined approach to costs, but at some point sub-contractors will be trying to rebuild their own margins which were badly squeezed during the downturn.
With visitor numbers up 15 per cent and forward sales ahead by 21 per cent to £1.26bn at the half-year stage, Persimmon has been busy adding to its land bank, spending £236m on 7,538 new plots in the first half and bringing the total land bank up to 70,716 plots. And forget about allegations of hoarding land, the high level of plots is necessary because despite improvements introduced, the pace of sales and construction are still governed by the inefficiencies of the planning system.
Group finances are in pretty good shape, too. Underlying return on capital employed rose 40 per cent to 14.1 per cent in the first half and, even after splashing out on new land and a dividend, there was still a net cash pile of £48.1m at the end of June.
Shares in Persimmon were down around 18 per cent from the high touched in July, but have already started to recover. Part of this may be as a result of investors starting to buy into the housing sector even earlier than usual before the sector performs its time honoured (although not inevitable) upward fillip in anticipation of the all-important spring house-buying season.
