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As Duncan Davidson steps down as chairman of Persimmon (LSE: PSN) at today's AGM, he leaves a successful company whose share price has increased almost seven-fold since 2000. Can the new boss keep it up? Persimmon has been buying rival house builders for a while. However, its latest purchase dwarfs the others. On 27th January, the Persimmon python finalised the purchase of the Westbury goat for £643 million. The acquisition was paid for in cash and loan notes. Unsurprisingly, this changed the structure of Persimmon's sleek balance sheet to one with an ungainly bulge. At the end of 2005 net debt was £258 million, so gearing was a meagre 15%. The enlarged group, however, is geared at 80%. The board says it plans to reduce the level of gearing to 50% by the end of the year. To achieve this, Persimmon has been rationalising by rebranding Westbury houses and closing Westbury sales offices, reducing head count and centralising management. Perhaps the most significant aspect of the Westbury acquisition is that Persimmon has been able to increase its land bank by 15,000 plots to 78,000. It's hard to overestimate how important a land bank is to a house builder. Without a land bank, it has nothing to build on and, hence, no business. Because of the need to renew it constantly, house builders often have poor cash profiles. Persimmon is no exception with a year end 2005 price/cashflow figure of 22 against a price/earnings ratio of around 11. If the much talked about, but as yet elusive, housing crash doesn't happen, then Persimmon may continue achieving an average selling price of £181,000 -- just as it did in 2005. At that price Persimmon generates an average pre-tax profit of £39,000 per plot. According to Persimmon, the 78,000 plots represent 4.5 years' sales. This might translate into operating profit of £680 million for this year. Average borrowing last year was £398 million and interest was £33.2 million (including £7.9 million of imputed interest on deferred land payables). For 2006 we might assume an average 8% interest rate and a corresponding interest bill of around £130m. With a 30% tax rate, that leaves a post-tax profit of around £380m. No doubt Persimmon will be working hard to slash the interest bill and meet forecasts. Even so, the current share price looks optimistic.
