Persimmon shares fail to perk up despite absence of further bad news

“Persimmon’s full-year results for 2023 offer no additional bad news and the guidance for 2024 even offers a glimmer of hope, as chief executive Dean Finch points toward a modest increase in completions, but the share price is not taking much notice,” says AJ Bell investment director Russ Mould.

“This may be due to uncertainty over when the Bank of England will get around to cutting interest rates in 2024 and the weak trajectory of the UK economy, but another reason may be valuation, as the shares do not look particularly cheap when set against the benchmark provided by Barratt’s all-stock offer for Redrow.

“FTSE 100 member Barratt is offering 1.44 of its own shares for every one share of Redrow. At the time Barratt traded at 530p a share, which meant the all-stock offer valued Redrow at 763p a share, or 1.29 times its historic tangible net asset value (TNAV), or book value, per share.

Source: LSEG Datastream data, company accounts. Based on 1.29 times multiple of historic book value implied by Barratt’s all-stock offer, using 530p a share closing price before the Redrow bid was announced (6 Feb 2024)

“However, Barratt’s shares have fallen since then, all the way back to 478p a share. That cuts the value of the offer to 691p a share and the implied multiple of book value to 1.17 times. That still implies the accident-prone Crest Nicholson, Bellway, Barratt itself and MJ Gleeson may be cheap, but it offers no real upside in Persimmon, for example.

Source: LSEG Datastream data, company accounts. Based on 1.29 times multiple of historic book value implied by Barratt’s all-stock offer, using 478p a share price (12 March)

“This all brings in the rule of thumb that builders are potentially cheap when they trade around one times book value and below and are probably expensive when they trade toward two times TNAV and above.

“It also begs the question of what this price tag means for other builders, allowing for how they have, in some cases, different business mixes, target markets and geographic exposures.

Source: LSEG Datastream data, Company accounts, Marketscreener, consensus analysts’ forecasts. Based on share prices as of the close on Monday 11 March

“Persimmon may therefore need to show greater earnings momentum before investors feel comfortable affording a higher valuation to the stock, and a multiple of book value that sits near the cyclical high of two times rather than the trough of one times (or lower).

“The good news at least is that the York-headquartered company does expect to increase completions in 2024, to between 10,000 and 10,500, compared to 9,922 in 2023. In addition, cost inflation is expected to ameliorate to between 3% and 5%, although for the moment prices for private properties in the forward sales book average £280,000 compared to 2023’s tally of £285,774 (the overall average selling price in 2023 was £255,752).

Source: Company accounts. *2024E based upon mid-point of management guidance alongside 2023 full-year results

“That does not help to cover the anticipated increase in costs and could further crimp margins in the coming year, even if analysts came into these numbers looking for a slight improvement in return on sales in 2024.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“At least there are no further provisions for building remediation and compensation after 2022’s £275 million hit and the balance sheet still has a net cash position of £420 million. This is a long way from the £721 million net debt pile with which Persimmon entered the 2007-09 recession, so the FTSE 100 firm is far better placed to weather a downturn in the housing market.

Source: Company accounts

“When the last recession reached its trough, Persimmon cut its dividend to zero in 2009. This time around, management is hoping to hold the base at 60p per share, a figure that equates to a 4.5% yield, something that may still catch the eye of patient income seekers, especially as Mr Finch and the board hope to start to increase the payout from here onwards.”

Source: Company accounts

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