Persimmon Live Discussion

myrdio 23 Jun 2018

Persimmon Plc the housebuilder Price drop was I believe down to results / trading updates from rivals showing signs of sales price slowdowns and cost inflation. “continuing build cost inflation has, however, had an adverse impact on our margins”- from Crest on the 12th June. Also Berkeley (price drops in London) and McCarthy&Stone updates/results around 18th June were negatives.

aspace 21 Jun 2018

Persimmon Plc the housebuilder I see the share price has plummeted since they went ex-div last week. Other than ex-div and general malaise of Trump’s tariff war, I cannot see any specific news to justify PSN’s drop. Anyone else? Seems overdone so I’ll probably just sit tight and collect the 8% in annual dividends.

II Editor 18 May 2018

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Rhigos 25 Apr 2018

Trading update today Good figures "The Group's forward sales position remains very strong with total forward sales revenue, including legal completions taken to date in 2018, of £2.76 billion, being 8% higher than last year".Good dividend return "The additional payments over the next three years will bring the total value of the Plan to £13.00 per share, more than double the £6.20 per share original commitment made by the Board in 2012. The total value of the Plan is now c. £4.07 billion.Total shareholder returns to date from the launch of the Group's new strategy in 2012 now exceed 500%."

The Dutchman 12 Apr 2018

Re: Future looking great Affordibility will stifle house price increases - it always does and any increase in interest rates will make it worse. Once house prices stop rising for a period, then profits will shrink quite rapidly as I've demonstrated below.It's too late to buy into this cycle - but if you are onboard already why not stay onboard and pick up another divi or two before banking the profits you have made and leaving a few % for the next buyer. Once I have made 5 x my original investment I'm off .

aspace 12 Apr 2018

Future looking great Correct me if I’m wrong but I think PSN is a solid investment.The 125p + 110p = 235p annual dividend represents a 9% yield at the current price around £26.50. This dividend will cost PSN £2.35 x 308,856,430 shares = £726 million pa. PSN can afford that dividend because it has been generating £500k – 800k free cash flow per annum AFTER tax and AFTER business re-investment over each of the past three years. As PSN’s vertical supply chain kicks in we could hope to see profits improve further. So the dividend should be payable out of free cash flow. But in any case PSN has £1,000 million in the bank after deducting the recent 125p special dividend which can also be used to pay future dividends. 2018 has started well and if that keeps up further increases to the dividend are a possibility. So 9% dividend continuation is assured, subject to future macro considerations. DEMAND FOR HOUSINGThe UK needs more new house builds 200-300k per annum. In 2017 PSN delivered 16k new houses (Taylor Wimpey delivered 14.5k) so we have a long way to go to improve market share and management are set on doing that. GOVERNMENT POLICY IS ON OUR SIDEGovernment is onside with the need for more homes as evidenced by (a) Help to Buy oriented towards new build homes and (b) private landlord disincentives designed to force them to sell-up by 2020 when mortgage interest cost will no longer be tax deductible. AFFORDABILITYAverage new build house price of £213k might seem steep when the average salary is only around $30k pa, so a house is 7x salary with an annual interest cost of £6-7k. But with the increasing participation by women in the workforce and side hustles like Airbnb, ebay and Uber, most house-buying households probably have double incomes anyhow meaning a £213k house really represents 3.5x household income which means most are not over-stretched in the prevailing low interest rate environment. So house prices are unlikely to be pushed down by widespread mortgage defaults and forced sales. FAVOURABLE INTEREST RATESGlobally, it doesn’t look like interest rates are heading upwards nor is there hyperinflation to require that. Most likely interest rates will remain low and increase steadily as central banks are fully aware of the catastrophic effect of Norman Lamont style panic increases. RESILIENT BANKSThe availability of mortgages should also be resilient against GFC-type shocks because the banks now have higher capital ratios than prior to the GFC. For instance Lloyds Bank has a CET1 capital ratio of 15%. WHAT'S NOT TO LIKE?It might be famous last words, but structurally I cannot see risks due to the strength of household income, government policy and resilient bank mortgage lending. Continuing sales by PSN and the house building sector should continue. PSN have foreseen the black swan of capacity constraints by increasing this year’s output through inhousing labour, brick and tile capacity which positions us well and helps to explain why we should continue to enjoy a +9% dividend. Other black swans anyone?

The Dutchman 09 Apr 2018

Re: 2017 annual report highlights Hi Aspace, Yes I think you have understood the position pretty well, and I'm not implying that there is anything wrong with profits already booked - thankfully accounting for housebuilders is a lot simpler than accounting for long term construction projects. My overall point, having worked with this industry in the past, is that some people assume that if house prices remain static and at their current levels then house builders' profits will remain at their current level, but this is not the case. If there is no inflation in house prices then the inflationary benefit of the 4 + years from land buying to selling the houses is lost. What I have shown is that large impact of losing that benefit. In other words it doesn't take an actual reduction in selling prices for housebuilders to become less profitable, it just takes a marked reduction in the rate of inflation or a plateauing of house prices.Try doing some simple spreadsheets of what you think the fundamental drivers are for Persimmon's profits over the past five years, including volumes, the "5 year buy land to sell house holding period", inflation in SP's over that period, inflation in build costs, efficiencies etc - it really is a simple business and a fairly good model wouldn't take too long ( Oh and dont forget the cost of the Outrageous management incentive scheme, which wont recurr). Shouldn't take more than a day to build a basic model. Now see what happens if house prices only increase at 2% pa or reduce by 1% pa, couple that with a small reduction in volumes and I think you will begin to see why the shares may be fully valued at the current price.Best of Luck

aspace 09 Apr 2018

Re: 2017 annual report highlights Dutchman, thanks for sharing your knowledge. I’m still trying to make sure I understand your point and respond sensibly. I’ve now got too much tied up in PSN to get it wrong. Your four year estimate is about right. PSN tell us that “new land investments generally [take] at least five years to build and sell through” (2017 ARA page 27). As to your concept of “holding gains” I don’t think we are talking about any gains PSN have already booked in 2017 or prior years. Those profits are securely banked. For each of the past seven years EBIT + non-cash expenses added back approximately equals net cash inflow from operations. So underlying historic earnings seem to be genuinely supported by cash flows with no material accounting/valuation games or timing differences going on. So if I understood correctly, future margins may be lower than those we have banked to date if future selling prices do not benefit from future inflation. I will over-use the word ‘future’ as I think that is what we are talking about. The historic margins are genuine as shown by the cash flows. I do agree future margins may be squeezed if either future inflation tails off or future demand for new houses tails off. As you have shown that is a mathematical necessity. Your scenario A assumed zero cost inflation and zero sales price inflation each year for four years. Pretty unlikely that we would experience four years of zero inflation. Scenario B assumed (favourable) differential inflation of 4%pa costs and 8%pa on sales, which is fairly optimistic and understandably produces a favourable result. IMHO reality is more likely to be in between those two scenarios. The problem is the business model itself which requires significant investment upfront before a sale is achieved many years later. But PSN have shown themselves adroit in managing that risky model to the company’s advantage, no doubt through cautious business case analysis including sensitivity under a variety of favourable/unfavourable inflation projections. Deflation would be a bigger problem for us because that could result in final selling prices being less than historic costs, although I think that’s pretty unlikely too and even if it did happen it should be blindingly obvious to all market participants and PSN would react accordingly to minimise the damage. Risk of future margin squeeze is also mitigated by PSN’s vertical integration of their supply chain to reduce cost. The profits on bricks, internal partitions, ceiling cassettes and, soon, roof tiles, now stay with us. The flow-through effect of this is PSN’s increasing profit margin from around 15% a few years ago to over +20% today. That increases our future margin safety buffer, which is another reason I am delighted with the foresight of this board and management team. Of course there are still other risks including a drop in demand for new housing or pressures from the competition which could mean the investment in Space4, Brickworks and the roof tile business may prove costly. In that respect the 3/5 customer satisfaction score concerns me a bit because I hope PSN are not cutting corners to maximise short-term profits at the expense of long-term.

The Dutchman 08 Apr 2018

Re: 2017 annual report highlights Aspace, Thank you for the time taken for your detailed response, however you misunderstand the point I was trying to make. Of course there are no "holding gains" or upward revaluations shown in the P&L account as land is considered to be stock or inventory held for resale and is therefore valued at the lower of cost and net realisable value; the accounting rules prohibit upwards revaluations and profit cannot be recognised until it is sold. What I would refer to as "holding gains" nevertheless arise and flow through the P&L a/c. Let us compare two scenarios. In scenario A there is no house price inflation, in Scenario B there is house price inflation averaging 8% . In both scenarios the time taken from signing a contract to buy land and building a house and legally completing the sale is 4 years ( not unreasonable I think). The targetted margin is for the sake of argument 20% of sales prices, incentives, selling costs etc are 5% of sales, and build costs ( excluding land are) are expected to be 35% of initially anticipated selling prices.Scenario A When negotiating to buy the land the appraisal of the site suggests that the selling price of one house is £250k. The build costs are therefore £88k (35% of 250), the overheads are £12k (5% of 250), therefore to achieve their margin 20% (£50k) margin they musn't pay more than £100k for the land. If they pay that figure the margin of 20% will be achieved ( 250 - 88 -12-100 = 50)Scenario B ( with inflation of house prices of 8% pa over 4 years, let's also make this realistic by adding in cost inflation over 4 years of half that rate so 4% pa over 4 years.So the costs are:Land per original appraisal £100kBuild costs - assuming an average of 4 years = 17% compound so £88k *1.17 = £103kSelling price 8% pa compound for 4 years is 36% so sales price = £340kSales costs = 340*5% =17kNow the Profit looks very different;340-100-103-17 = £120k A whopping 140% higher!So the profit has increased from £50k to £120k purely through the effect of inflation on house prices over the holding period of the land. That is what I meant by the holding gain, and illustrates how, if house price inflation stops, then housebuilders profits could tumble.You can play with these figures how you like, but the results are similiar all due to the impact of inflation on selling prices when the cost of the raw materials ( land ) was fixed a number of years ago. If the housebuilder anticipates future inflation in house prices when bidding for land, and then that inflation fails to materialise the impact is even greater.I do know about audits and housebuilders accounts from different sides of that table.

aspace 08 Apr 2018

Re: 2017 annual report highlights Hi there Dutchman and thx for posting a few areas of concern. Let's see if we can figure them out. "all the stats show that the market is slowing and house price growth is tailing off"I take it you are questioning whether we might be at the end of a strong market cycle. Sure I've seen the value of my own house plateau which seems to support your point. But that's second hand houses not new houses such as those built by PSN. New houses remain in demand which should be favourable to the housebuilding sector. "that land would have been purchased based on expected selling prices at the time the land price was negotiated"With every company I've had dealings with, they would have sought to pay the cheapest price possible based on market prices at the time of purchase. The "expected selling price" would not have been part of the negotiation with the land seller who would have been screwed down to the lowest possible price. The only consideration of "expected selling price" would have been PSN's internal business case go/no-go decision. "if house prices hold steady over, say, 3 years then the holding gains evaporate"You had me scratching my head on that one so I went back to the accounts. I may need your help on this. Here's what I found1) The income statement shows margin as being made up of sales minus cost of sales. They do not show asset revaluation gains as, say, a commercial property investor would. (2) But there ARE still risks around revenue recognition, for instance if they had Jan 2018 sales which were wrongly brought into Dec 2017. (3) Land inventory is shown at lower of cost or net realisable value (note 2 accounting policies). Cost can include the costs of gaining planning permission and other improvements. So land inventory can be impaired down but not valued up based on expected selling price. (4) These matters are reviewed by the external auditors Ernst & Young and reported on in their report (pages 82 & 83). So I don't think there are any "holding gains" on assets that are being held but have not yet been sold because as far as I can see PSN do not book asset revaluation gains. But I guess it is still possible there might be impairments to land cost which have not been booked in the accounts. The assurance we have on that is the management bi-monthly development valuation meetings which are also subject to review by Ernst & Young. So on the presumption that both management and Ernst & Young know what they're doing, I think we should be OK on the matters you raised. But by all means correct me if I'm wrong.

The Dutchman 06 Apr 2018

Re: 2017 annual report highlights As I've posted before this has been virtually my best investment over the last few years with a an annual compound rate of return well in excess of 30%pa.However all the stats show that the market is slowing and house price growth is tailing off -- and what worries me is the extent to which the Gross Margin for housebuilders is dependent on "holding gains" ie the houses they are selling now are built on land purchased 2, 3, 5 years?? ago and that land would have been purchased based on expected selling prices at the time the land price was negotiated. So do we know how much of the margin is just a "holding gain" ? The problem is of course that if house prices hold steady over, say, 3 years then the holding gains evaporate. Or worse still if the land buying team had built-in an assumption of ongoing house price inflation.So to me this element of the financial performance of is opaque. Can anyone cast any light on this or know if the "holding gain" is disclosed anywhere in the financial presentations.The government has recently berated the housebuilders for not building out their land bank quickly enough and at least one major housebuilder CEO said that capacity constraints meant they couldn't do it more quickly. For which the read across is probably "why would we want to destroy our business model and help drive prices down"

aspace 05 Apr 2018

2017 annual report highlights Having just gone through the 2017 annual report I noted the following highlights:Housebuilding output is hitting up against human and material resource constraints which PSN has anticipated through its Brickworks and Space4 manufacturing operations and it’s also getting into manufacture of roof tiles for 2019. CEO Jeff Fairburn and CFO Mike Killoran are mitigating their bonuses with £50m voluntary reduction, charitable donations and commitment to employment longevity. They didn’t have to do that but I’m awfully glad they did. The Capital Return Plan has been upward only since inception. What began as a <110p annual dividend has become a 110p + 125p = 235p annual dividend promised for each of the next three years resulting in a monster yield of 9% based on today’s share price. And it would not be unfeasible that this could be revised upwards yet again in future years because annual cash receipts of £800m after tax with negligible debt can easily fund the new £726m annual dividend without touching the £1.3 billion cash cushion. I don’t think the wider market is aware of the strength of this yield as the 2017 numbers are still hot off the press. For instance iii’s Analysis/Fundamentals tab shows PSN as having a zero dividend yield. So readers on this board have a temporary advantage until the databases catch up with the figures. The only thing I did not like in the annual report was a 3 star customer rating instead of 4 or 5. Not sure why but guess it relates to after-purchase snagging. Any ideas anyone? Hope to see that improve. I remain a fan of the board and management team for their market and supply chain foresight for which we are now reaping the benefits; and for their generosity towards shareholders. PSN are a newly unfolding case study in forward-thinking and have redefined what capital discipline really means. Which is? Allocate capital to market needs (in this case sales offices and vertical supply chain) as priority one and pay out anything over and above that to the management and shareholders as priority two. They have done both exceedingly well. PSN are now outshining my other favourite company: Berkshire Hathaway has been sitting on over USD$100 billion cash for a long time now effectively generating negative returns without paying a cent to shareholders. That is starting to look like capital indiscipline. We should be proud of PSN as a great British company.

BubblingUp 02 Mar 2018

Re: Final results - SP +11% Dug deep and added a tranche this morning. If three years from now the price has held and I've had cash back of 27% I'll be well content.

Mark Y38 01 Mar 2018

Ex-Div Dates For those asking:Interim Dividend (125p) 8th March, paid on 29th MarchFinal Dividend (110p) 14th June, paid on 2nd July

aspace 01 Mar 2018

Re: Final results - SP +11% I hope you don’t mind if I respond to several of those points in a single post …BubblingUp. Yes the £4.35 entry price was prescient in hindsight (haha see what I did there). But at the time PSN was on a PE of 12 and dividend yield of 2%. What management have done in the intervening years has been a remarkable turnaround by aligning the workforce and structurally integrating the supply chain to accelerate production at lower cost as seen in steep improvements to top and bottom lines as well as free cash flow. While management have lined their own pockets they have also been extremely shareholder-friendly. Jeff Fairburn has been at the helm for most of that time so I am exceedingly thankful for his efforts. Ironically both those metrics PE and Div Yield are slightly BETTER at today’s price. On BRK, please come and join us on the BRKA board where we could do with more posters. Cavebear. PSN is still worth buying IMHO as the price has dropped and is on a PE of around 11 and dividend yield of 9% by my calcs. What’s more, that dividend yield is sustainable. Have a look at PSN’s recently released balance sheet (link below). They have £1.3 billion in cash. No borrowings. They have been generating after tax free cash flow of +£500 million each year. Very few companies tick all these boxes, especially at a 9% yield. I don’t know of any. Here is the link to the recently released financial statements:[link] Thanks for sharing that valuable learning point. You have my sympathy and empathy. A divorce cost me +50% plus huge emotional blow. There was nothing positive about the destruction of our family unit. Families are the basic living cells of our society yet family law encourages divorce by rewarding the partner who wishes to exit.