Persimmon shares: wonderful value against uncertain outlook

Some stock market domestic share capitalisations have come to suddenly resemble a war zone; a bit like the recent accounts of the Battle of Jutland during the First World War (before the EU) when great capital ships were there one moment and gone the next; in a vast explosive inferno of steel and flame sinking rapidly beneath the waves to end up in Davy Jones’s locker. They will never rise again from the bottom but shares do. So we need to keep an eye open for such a possibility by trying to measure value in relation to much diminished share prices. The oil stained, smoking flotsam of ships sunk inaction float on the waters to remind us of a terrible reality. But in the liquidity of stock markets all thought of equity value seems to vanish from sight and thought as fear and uncertainty take hold.

The UK building and construction sector has been severely damaged by the unexpected, below the waterline torpedo of the Brexit U-boat; the more measured observers always said this would be the result whilst others did not!

The Persimmon share price……….

As little time ago as last March, the Persimmon share price was riding buoyantly; peaking 2255p last March. Now, after the latest results from the company, the share price has sunk to 1293 p and still taking on water; that is to say, a share price that has fallen by nearly 43 percent in less than three months. The fall has been so great over so short a time span that I had to check the again, to make sure I have got it right. You need to go back about two years to track a Persimmon share price lower than that – another proof if any were needed that so called “Project Fear” was a mere thoughtless, give away line and not very measured.

In a month, the Persimmon share price has fallen by more than 34 percent whilst the FTSE100 Index has risen by just under 4 percent. And that seems to have been on the back of what appears to have been quite good results. This last week, the share price fell over 10 percent whist the overall FTSE 100 Index rose 2.5 percent. They might have been shares on different Indexes on different planets!

The Persimmon historic share price and valuation……..

On the basis of the last annual dividend of 110p, Persimmon shares at a share price of 1293p (last seen) are valued at an historic annual dividend yield of 7.7 per cent. Either the market has gone too far too quickly, or the future really is grim. Persimmon’s earnings per share last year, on the basis of accounts drawn up under UK statutory regulations, put the shares on an historic share price multiple of 7.8 times or, putting it another way, of an earnings multiple of 12.83 percent. Valuations which in more normal times would look ostensibly attractive, when not staring down a huge chasm just opened up, to try and see the bottom.

The first half trading statement…………

The latest results yesterday published by house builders Persimmon, was in fact the trading statement for the half year to June 30 2016. The report and accounts for the six months to June are due to be published on 23 August next when we shall be in month two of post referendum existence.

We were told that the Group over the six months of trading to 30^th June last had built and completed 7,283 new houses; up 6 percent from the volume completed in the first half of the previous year. We were also informed that the price of the average house has increased by another 6 percent to £205,500. Consequent of one six percent on top of another, total Group sales revenue in the six months increased a total of 12 percent to £1.4 billion; up from £1.33 billion the previous year. The average price, looking like a multiple of some seven or eight times the average wage, emphasises the widespread of customers Persimmon had in the first half as well as reminding us of how financially difficult it is for the average worker on an average salary to afford a house.

The macro economic conditions supported the builder’s activities in the shape of low borrowing costs for mortgage borrowers and the rising level of confidence amongst borrowers. The supply of mortgages was also strong with a reported 18 percent increase in mortgage approvals over the previous year. Interestingly, mortgage approvals for April/May were ahead of the level a year earlier despite the oncoming referendum and despite the fact that the previous year approvals had also been robust. In the admittedly brief period since the UK ejected itself from the world’s largest and most affluent trading bloc, house sales have remained at “good levels.”

The company also refers to its “move-in” dates; the process by which the company releases completed houses for sale in the coming accounting period. We are told that for the second half of this year, the management has or will be releasing completed houses from thirty five sites where there has been much customer interest. Behind that there is a production line of another three hundred and fifty sites (including 185 new sites opened this year) which will further increase the operating profitably of Persimmon, to the extent that operating margins next year are estimated to rise beyond the 23 percent operating margin in the second half of last year.

Conclusion……      

The sector and these shares may face unknowable conditions by 1239p (last seen,) these shares offer what looks like strong fundamental value on an historic basis. Taking the high net worth position into account (worth an estimated 740p a share) these shares after taking out the net asset figure above, sell on an historic, statutory earnings multiple of a notional of  between 3 and 4 times only. Moreover, there is no debt in the balance sheet.