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Finnzac (< 20)

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This housebuilder is a long term hold!

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June 13, 2018 – Comments (0)

 

There are many housebuilders that look attractive today but it was Persimmon homes who managed to catch my eye with a debt free balance sheet and dividend yield currently sitting at around 8%. Also, with the current share price trading at a healthy >30% discount to future cash flows and a profit margin of 22% there’s a lot to like about Persimmon.

The demand for housing in the UK still remains strong with the government announcing in the 2017 Autumn Budget plans to increase the annual volume of new homes built to 300,000 per year by 2022. This has been supported by the help to buy scheme which has undoubtedly boosted the market in recent years and is scheduled to remain in place until 2021 thus continuing to support those wishing to purchase a house in the short term at least.

The Persimmon management appears to be acting with the interests of shareholders in mind too based on  their long term Capital Return Plan, which, in 2012, initially committed to returning £1.9bn (£6.20 per share) of surplus capital to shareholders until 2021. To date this has been successfully achieved and has recently been increased by a further £1.25 per share each year for the next three years to a total of £13.00 per share by 2021 (see note 1), supporting the attractive dividend currently on offer. The management has also efficiently used the cash it generates with performance figures in the last year of 24.58% , 16.33%  and 26.98%  for ROE, ROA and ROCE respectively.

Persimmon has also invested wisely in expanding offsite manufacturing capability to help security of supply and help support future growth. A brick plant was commissioned in 2017 and Space4 produces timber frames and highly insulated wall panels and roof cassettes as a modern method of constructing new homes. They are also in the process of establishing a new facility to manufacture their own roof tiles.

The company is largely aware of the problems that face the construction industry with the effects of Brexit and ongoing economic uncertainty potentially reducing consumer confidence, impacting on demand and pricing for new homes and affecting revenues, profits and cash flows. There is also the risk in changes on freedom of movement and currency devaluation which would restrict the availability of skilled construction workers and increase material costs (see note 1). However, Persimmon should continue to prosper in the short term but have built a solid foundation of no debt, strong profit margins and sound management to help them absorb any financial impacts the next inevitable downturn will bring before being able to flourish once again thereafter.

 

Notes:

1 - 2017 Persimmon Annual Report

 

The author owns shares in Persimmon 

 

 

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