PERSIMMON PLC

A Valuation Based Financial Analysis

 Table of Contents
1. Introduction ...................................................................................................................................... 3
2. Persimmon Plc: Overview .............................................................................................................. 3
2.1 Persimmon Plc: Strategy and Outlook of Company ............................................................ 3
2.2 Persimmon Plc: Porter’s Five Forces Analysis for Company .............................................. 4
2.2.1 Threat of New Entries ........................................................................................................ 4
2.2.2 Threat of Substitutes ......................................................................................................... 4
2.2.3 The Bargaining Power of Customers .............................................................................. 4
2.2.4 The Bargaining Power of Suppliers................................................................................. 4
2.2.5 Rivalry among Existing Firms ........................................................................................... 4
2.3 SWOT Analysis: Persimmon Plc............................................................................................... 4
2.3.1 SWOT-Strengths ................................................................................................................. 4
2.3.2 SWOT-Weaknesses ............................................................................................................ 5
2.3.3 SWOT-Opportunities ......................................................................................................... 5
2.3.4 SWOT-Threats ..................................................................................................................... 5
3. Financial Performance: Ratio Analysis ......................................................................................... 6
3.1 Efficiency Allocation Ratios: ROIC and ROCE ....................................................................... 6
3.1.1 ROIC...................................................................................................................................... 6
3.1.2 ROIC...................................................................................................................................... 7
3.2 Profitability Ratio ...................................................................................................................... 8
3.3 Liquidity Ratio............................................................................................................................ 8
3.4 Solvency Ratios ......................................................................................................................... 9
4. Valuation Models ............................................................................................................................. 9
4.1 Discounted Cash Flow Model (DCF Model) ........................................................................... 9
4.2 Asset and Market Basis Valuation......................................................................................... 10
4.2.1 Price/Earnings Ratio ........................................................................................................ 10
4.2.2 NAV (Net Asset Value) ..................................................................................................... 11
4.2.3 Price to Book Ratio........................................................................................................... 12
4.2.4 Dividend Yield .................................................................................................................. 12
4.3 Assumptions............................................................................................................................. 12
5. Conclusion and Recommendations ............................................................................................ 12
References .......................................................................................................................................... 14

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1. Introduction
The valuation of Persimmon Plc was performed using the discounted free cash flow method
by analysing the shareholder value of the group using Microsoft Excel. This approach is done
using the shareholder value analysis which evaluates how corporate decisions influence the
net present value of the returns to shareholders. The advantage of using shareholder
analysis lies with one existing objective by companies of maximising the return to the equity
(Pandey and Arora, 2013). Therefore, the financial performance of persimmon can be
examined through observation of shareholders return. The analysis was accomplished
through observations of persimmons financial performance based on measurements and
calculations of the value drivers such as sales growth, operating profit margin, incremental
fixed capital investment, and incremental working capital investment, required rate of
return, tax, debt and market securities. The forecasts were composed through use of
historical data and assumption on future performance based on the historical data and
market performance. This method employed is one of many existing valuation techniques.

2. Persimmon Plc: Overview

Persimmon Plc is a construction company based in the United Kingdom. The
company is listed on the London Stock Exchange and is a part of the FTSE 100 Index.
The Company has trademark in various brands including Persimmon Homes, Charles
Church, Westbury Partnerships and Space4. Persimmon Homes trades in sales of
houses including apartments in 400 locations. Westbury Partnerships trades in sales
of economical social housing. Charles Church trades in construction of homes in the
UK. The brand Space4 operates on manufacturing resources such as timber frames,
insulated panels and roof cassettes for the construction of new homes
(Markets.ft.com, 2018).

2.1 Persimmon Plc: Strategy and Outlook of Company

The Group’s strategy is such that it is designed to create and protect superior levels
of shareholder value over the long term and through the housing cycle. Company
major focuses on delivering disciplined growth by meeting customer demand for
well-designed, quality homes in locations where people wish to live and work.
Company has strategy that is cantered at growth and management of it’s of business
at an optimal scale whilst maximising value through land replacement and
development as market conditions allow. Deliver our strategic land holdings for
development and maintain a high quality consented land bank to support our house
building operations. Maintain discipline over the level of capital employed within
the business through the housing cycle and optimise shareholder value and returns
over the long term. Deliver our strategic land holdings for development and
maintain a high quality consented land bank to support our house building
operations. Maintain discipline over the level of capital employed within the
business through the housing cycle and optimise shareholder value and returns over
the long term.

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2.2 Persimmon Plc: Porter’s Five Forces Analysis for Company
2.2.1 Threat of New Entries
Entry barriers are relatively marginal for the household industry, as there is no consumer
switching cost and zero capital requirement. There is an increasing amount of new
companies like Persimmon Plc appearing in the market with similar prices than Persimmon
Plc products. Persimmon Plc isn’t seen as any ordinary company, but also as a brand. It has
held a very significant market share for a long time and loyal customers are not very likely
to try a new brand.

2.2.2 Threat of Substitutes

Industry has plenty of house holding services and products providers, Persimmon Plc
doesn’t really have an entirely unique and identifiable product line that stands out when
compared to others in business. Still there are chances that if identifications of
attractiveness test occurs, Persimmon Plc might feel some danger from competitors.

2.2.3 The Bargaining Power of Customers

The individual buyer has some major pressure on Persimmon Plc, Large contractors, like
Association of persons, have bargaining power because of the large order quantity, but the
bargaining power is lessened because of the end consumer brand loyalty.

2.2.4 The Bargaining Power of Suppliers

The main components that are needed for out from production pipeline, raw material, Bricks,
Land, Cement, water and labour are available in larger quantities the suppliers are not
concentrated or differentiated. Persimmon is likely a large, or the largest customer of any
of these suppliers.

2.2.5 Rivalry among Existing Firms

Currently, the main competitor is J M AB which also has a wide range of house production
under its brand. Both Persimmon Plc and J M AB are the predominant house holding
providers through furnished homes and committed heavily to sponsoring outdoor events
and activities. There are other soda brands in the market that become popular, like Bonava
AB, Taylor Wimpey and Barratt Developments, because of their unique offerings. These
other brands have failed to reach the success that Persimmon Plc and J M AB have achieved
and enjoyed over the years.

2.3 SWOT Analysis: Persimmon Plc

This SWOT Analysis of Persimmon plc provides a strategic report of businesses and
operations of the company. The SWOT analysis shows strengths, weaknesses, opportunities
and threats. This SWOT analysis of Persimmon plc can provide a competitive advantage.

2.3.1 SWOT-Strengths
The Persimmon Plc is rich in monetary assistance that it gains over period of time, another
thing that is distinctive in this case is that the company has a skilled workforce. When
compared to other players of industry the high growth rate is pretty evident for Persimmon
Plc, Another feature that it has is the experienced business units for business operations,

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through existing distribution and sales networks company leads to provide fast services to
customers.

2.3.2 SWOT-Weaknesses
Although the rate of growth for Persimmon Plc is higher but, one weakness that it has the
higher costs that it faces in research and development for house holding.

2.3.3 SWOT-Opportunities
The growth chance are high to growing demand for homes, and also the expansion into the
new markets is also higher probable. The company has chances to join hand with investors
so that it can obtain extra capital for growth. There are bright chances due to greater R&D
that company can go on to provide new products and services, The globalization has opened
the gates to enter global markets

2.3.4 SWOT-Threats
Along other growth chances there are some costs that are looming around the company in
shape of tax changes, price changes and borrowing rates are also increasing.

Table : SWOT Aalysis Persimmon Plc

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3. Financial Performance: Ratio Analysis
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas. The ratios are categorized
as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios,
Profitability Ratios, and Market Value Ratios. Ratio Analysis as a tool possesses several
important features. The data, which are provided by financial statements, are readily
available. The computation of ratios facilitates the comparison of firms which differ in size.
Ratios can be used to compare a firm's financial performance with industry averages. In
addition, ratios can be used in a form of trend analysis to identify areas where performance
has improved or deteriorated over time. Because Ratio Analysis is based upon accounting
information, its effectiveness is limited by the distortions which arise in financial
statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio
Analysis should only be used as a first step in financial analysis, to obtain a quick indication
of a firm's performance and to identify areas which need to be investigated further. Three
types of ratio analysis will be conducted for financial analysis of both the companies, which
are elaborated below.

3.1 Efficiency Allocation Ratios: ROIC and ROCE

3.1.1 ROIC
A calculation used to assess a company's efficiency at allocating the capital under its control
to profitable investments. Return on invested capital gives a sense of how well a company
is using its money to generate returns. Comparing a company's return on capital (ROIC) with
its weighted average cost of capital (WACC) reveals whether invested capital is being used
effectively.
By going through financial of Persimmon Plc one founds that the ROIC ratio over the period
of last five years has been pretty stagnant in terms of average rate that has been seen, if we
see it for 2016 it was 26.23% the highest of last five years starting from 2012, there are
many reasons behind the increasing trend one can observe, the increased amount of
investments means that ultimately company has more chances of growth. For other years
2012 has lowest i.e. 12.66%, further is shown in table,

Table

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3.1.2 ROIC
The return on capital employed (ROCE) ratio, expressed as a percentage, complements the
return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity
to reflect a company's total "capital employed". This measure narrows the focus to gain a
better understanding of a company's ability to generate returns from its available capital
base. By comparing Earnings Before Interest and Tax (EBIT) or net operating profit to the sum
of a company's debt and equity capital, investors can get a clear picture of how the use of
leverage impacts a company's profitability. Financial analysts consider the ROCE
measurement to be a more comprehensive profitability indicator because it gauges
management's ability to generate earnings from a company's total pool of capital. By going
through financial of Persimmon Plc one founds that the ROCE ratio over the period of last
five years has been pretty evident of company’s growth in terms of average rate that has
been seen, if we see it for 2016 it was 30.44% the highest of last five years starting from
2012, there are many reasons behind the increasing trend one can observe, the increased
amount of investments means that ultimately company has more chances of growth. For
other years 2012 has lowest i.e. 12.41%, further is shown in table

Table

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3.2 Profitability Ratio
Earnings per share, also called net income per share, is a market prospect ratio that
measures the amount of net income earned per share of stock outstanding.

For 2016 and 2015 Persimmon Plc had EPS of 2.64 and 3.15 respectively, while for earlier
period of three years the EPS was smooth as well for 2014 EPS was 2.54, for 2013 it was
perfect 2.0 and the year 2012 saw least earnings that a single share could generate, it was
1.94.

Gross profit rate (GP rate) is a profitability ratio that shows the relationship between gross
profit and total net sales revenue.

A consistent improvement in gross profit ratio over the past years is the indication of
continuous improvement. If GP rate for Persimmon Plc is seen, it is evaluated that over the
period of 5 years it had GP rate of 0.15 for 2016 and 2015, both the years of 2013 and 2014,
were quit years with GP rate 0.13 and 0.14, but the 2012 GP rate of 0.16 was highest
achieved, showing that company lost momentum to increase the profits.

The profit margin ratio, is a profitability ratio that measures the amount of net income
earned with each dollar of sales generated by comparing the net income and net sales of a
company.

By looking at reports of Persimmon Plc, profit margin ratio is found be between 4.80%-6%,
showing less expenses incurred by the company, yearly it was Highest in 2015 stood at
5.93% while lowest for 2016 stood at 4.57% in 2016, and 2014, 2013 and 2012 were
shown at 5.50%, 4.90% and 4.80%.
Return on equity (ROE) is the amount of net income returned as a percentage of
shareholders equity. It reveals how much profit a company earned in comparison to the total
amount of shareholder equity found on the balance sheet.

Shareholders from Persimmon Plc saw a fantastic ROE of 88.00 in 2016 but had seen nothing
in 2015, 2014, 2013 and 2012, indicating a deficit earned on the equity of owners invested
in Persimmon Plct International.

3.3 Liquidity Ratio

The working capital is measure of a company’s short-term liquidity and important for
performing financial analysis, financial modelling, and managing cash flow.

For 2016 Marriot had $ (1776) million, while for the year 2015 it faced most the $(1849)
million, however for years 2014,2013 and 2012 Persimmon Plc had $(1139) million, $(772)
million and $(1298) million in deficit after paying out its obligations.

The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay off
its short-term liabilities with its current assets.

By going through reports of Persimmon Plc had a current ratio under 1 for all 5 years, where
highest was in 2013 with 0.71,while for 2015 Marriot had lowest current ratio of 0.43. And
in remaining three years it was seen as 0.63 in 2014, 0.53 in 2012 and 0.65 in 2016,

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Average Collection Period is the average number of days it takes a company to collect its
accounts receivables,

Persimmon Plc on average has 31 days of period to recollect its receivables in cash form, for
2016 it was 36.17 the highest In 5 years reports, and 2015 had lowest with ratio of 27.63,
other years2014, 2013 and 2012 saw 28.39,29.85 and 29.85 days to get the receivables in
form of cash 2016 and 2015

3.4 Solvency Ratios

Debt to Asset Ratio is the percentage of total assets that were paid for with borrowed money
- creditors, liabilities, and debt.

If results of analysis are seen they show that for all years of sample period Persimmon Plc
faced high distress to pay off the liabilities through its assets, in 2014 it sold 132% assets
to pay liabilities, in 2015 it was 159% while 2016 saw least percent of assets be scraped
for liabilities only, 59%.
Current cash debt coverage ratio is a liquidity ratio that measures the relationship between
net cash provided by operating activities and the average current liabilities of the company.

Poor performance saw Persimmon Plc having lesser cash to cover the current obligations,
like in 2015 it was 0.05 while in 2016 it was 0.06 only 2012 had better ratio to cover debts
through assets for company with 0.127,

Times Interest Earned measures the ability of an organization to pay its debt obligations, by
financial analysis it was seen that for all sample period years 2016:6.06 and 2012:7.20 were
highest rates, however other years too saw normal rate of this ratio like for 2015 it was 0.05
for 2014 was 0.06 and for 2013 it was seen 0.06.

Free cash flow is the cash that a company has left after it pays for any capital expenditures
it makes.

If we look at the reports of both the companies we could see that Persimmon Plc had more
cash left after paying for expenditures because of its business scale like FCF was $ 1009.09
million for 2016, for 2015 it was $ 872 million while in early three years of sample period
it had FCF of $ 590 million for 2014, $ 540 million for 2013, $ 361 million for 2012,

4. Valuation Models
It is use of various models that help to determine the economic value of a company, there
are separate discrete reasons for which the valuation of a company is done in order to
check the value of businesses, the reasons could include the sales value of company, the
ownership status of the business, and to check the expansion probabilities. Here different
types of models are employed to determine the value Persimonn Plc.

4.1 Discounted Cash Flow Model (DCF Model)

The discounted cash flow method is used by professional investors and analysts at
investment banks to determine how much to pay for a business, whether it’s for shares of
stock or for buying a whole company. And it’s also used by financial analysts and project
managers in major companies to determine whether a given project will be a good
investment, like for a new product launch or a new manufacturing facility. 41%
Share price is £25.59 vs. Future cash flow value of £43.64. Persimmon's share price is

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below the future cash flow value, and at a moderate discount (> 20%). Persimmon's share
price is below the future cash flow value, and at a substantial discount (> 40%).

4.2 Asset and Market Basis Valuation

4.2.1 Price/Earnings Ratio
It is a ratio that measures the current share price relative to price-share earnings of a
company. For last five years the P/E ratio for Persimonn Plc was highest in 2012
amounting to 14.91, however with each passing year the ratio has shown a declining trend
overall for example it was 9.02 for 2016 while it was 14.71 in 2013, both 2014 and 2015
saw the ratio around 12.18.
Table

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4.2.2 NAV (Net Asset Value)
NAV is often associated with mutual funds, and helps an investor determine if the fund is
overvalued or undervalued. When we talk of open-end funds, NAV is crucial. NAV gives the
fund's value that an investor will be entitled to at the time of withdrawal of investment. In
case of a close-end fund, which is a mutual fund with fixed number of units, price per unit
is determined by market and is either below or above the NAV.For last five years the NAV
ratio for Persimonn Plc was lowest in 2012 amounting to 577.91% per share, however
with each passing year the ratio has shown an increasing trend overall for example it was
818.09% per share for 2016 while it was 593.32% per share in 2013, both 2014 and
2015 saw the ratio around 640.21% per share and 728/40% per share respectively.

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4.2.3 Price to Book Ratio
This ratio is used to measure the market price of a company in relation to its book value
recorded, For last five years the NAV ratio for Persimonn Plc was highest in 2012
amounting to 14.91, however with each passing year the ratio has shown a declining trend
overall for example it was 9.02 for 2016 while it was 14.71 in 2013, both 2014 and 2015
saw the ratio around 12.18.

Table

4.2.4 Dividend Yield

It is a financial ratio indicating how much a company pay to shareholders with respect to
its share price, over the period of last five years only once the Persimomm Plc has paid the
dividend to its shareholders, that was in most recent year 2016 where the dividend yield
amounted to 6.19% otherwise the company didn’t pay dividend over the years.

4.3 Assumptions
The risk free rate of 1.49% is from the 10 year government bond rate in GBP. The bottom-
up beta is estimated by analysing other companies in the same industry.The Equity Risk
Premium is calculated by subtracting the risk free rate from the market return premium
(8.51%) (source: Buffet).The dividend discount model is automatically used for companies
in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs),
Diversified Financial Services and Capital Markets.

5. Conclusion and Recommendations

According to the results obtained from the all the liquidity ratios calculations which working
capital, current ratio, current cash debt coverage ratio, receivables turnover ratio and
average collection period the following is concluded. It is found working capital is not
commonly used to calculate liquidity but for this analysis. However it was found also that
pay out of dividend does matter a lot Persimmon Plc, Reflect favourable results. For other
hand, the current ratio results for Persimmon Plc. Shows better ability to meet unexpected
needs for cash.
Due to current ratio has a disadvantage because it uses year-end balances, may not be

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present a representative current position during most of the year. A ratio that partially
corrects this problem is current cash debt coverage ratio. For this analysis the results show
that Persimmon Plc. has better ability to pay the current short term debt. The above
information reflects that waste connection has better ability to pay the liabilities and pay
the current liabilities in short term. Otherwise, receivables turnover ratio and average
collection period reflect favourable results for company. This means that republic service
has better ability for liquidity of the receivables and collection success.

Although, republic service has favourable results for these last two ratios, the values of
Persimmon Plc. We’re not so far from the obtained by other businesses. Our consulting firm
concludes that Persimmon Plc, Is more liquidity, mainly based on the combined results of
current ratio and current cash debt coverage ratio From the results obtained on solvency
ratios calculations which are debt to total assets ratio, cash debt coverage ratio, times
interest earned ratio and free cash flow the following is concluded. .

The debt to total assets ratio show favourable results for Persimmon Plc, obtaining lower
results during the last years representing lower percentages of company total assets
provided by creditors. The cash debt coverage ratio in Persimmon Plc, Reflects better ability
to pay the total long term debt than others. Based on the times interest earned ratio
Persimmon Plc, Shows best ability to meet interest payments as they come due than the
others. According to above information, with these three ratios, Persimmon Plc, Has lower
percent of total assets provided by creditors, has better ability to pay long term debt and to
pay interest as they come due; in other words favourable has results debt paying.

We determined the results for Persimmon Plc so that it uses to enhance the potential
control in highly competitive lodging and hoteling industry. First it is recommended that
Persimmon Plc reduces it liabilities to it won’t face financial distress easily and will see
positive cash flows.

It is also recommendation is to increase their free cash flow because this promotes the
growth of the company with new investments, projects and dividends pays. FCF could be
increased through better value provided and floating more shares to the public. Another
concern was the delayed payment of debts, it will critical if company repays obligations
within time so that it could sustain the mutual trust with lenders, an average of month to
collect receivables it very long considering with less liquid assets, Persimmon Plc must sort
out ways to get paid readily, it could use incentives for fast payments. Roe is probably most
concerning point, with negative income the company must use ways to cut out expanses so
that owners get value for their investment in Persimmon Plc. Persimmon Plc has escalated
its operations in whole world, but it must hire more skilled human capital to achieve
continuous improvement aided quality, which in turn will boost cash inflows, because
humans are greatest capital that any manager can think off, Persimmon Plc must conduct
best HR practices through R&D to decrease the deficits and increase the quality as compared
to its competitors

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References
Uk.finance.yahoo.com. (2018). PSN.L: Summary for PERSIMMON PLC ORD 10P -
Yahoo Finance. [online] Available at:
https://uk.finance.yahoo.com/quote/PSN.L?p=PSN.L[Accessed 26 Jan. 2018].
Londonstockexchange.com. (2018). PERSIMMON share price (PSN) - London Stock
Exchange. [online] Available at:
http://www.londonstockexchange.com/exchange/prices-and-
markets/stocks/summary/company-
summary/GB0006825383GBGBXSET1.html[Accessed 30 Jan. 2018].
Markets.ft.com. (2018). Persimmon PLC, PSN:LSE forecasts - FT.com. [online]
Available at:
https://markets.ft.com/data/equities/tearsheet/forecasts?s=PSN:LSE[Accessed 2
Feb. 2018].
Persimmonhomes.com. (2017). [online] Available at:
https://www.persimmonhomes.com/corporate/media/314501/annual-report-
2016.pdf [Accessed 2 Feb. 2018].
Gurufocus.com. (2018). Persimmon PLC (PSMMF) Stock Analysis - GuruFocus.com.
[online] Available at: https://www.gurufocus.com/stock/PSMMF[Accessed 2 Feb.
2018].
Pandey, M. and Arora, D. (2013). Shareholder Value Analysis: A Review. International
Journal of Science and Research, [online] pp.2319-7064. Available at:
https://www.ijsr.net/archive/v4i5/SUB154598.pdf[Accessed 2 Feb. 2018].
Haslett, E. (2018). Persimmon sales rise but analysts aren't impressed. [online]
Cityam.com. Available at: http://www.cityam.com/275365/persimmon-sales-rise-
but-analysts-arent-impressed[Accessed 2 Feb. 2018]. (Haslett, 2018)

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