Stephen Bland picks some Persimmon for his value portfolio.
The housebuilder Persimmon (LSE: PSN) recently published half-year results to 30 June and I like the look of them.
It is in the process of recovering from the awful slump in that business, and is doing so very ably with a resumption of the dividend suspended a couple years ago and a huge reduction in debt. In fact, it did pretty well to survive at all given the high gearing that it carried just before the recession kicked in. Suspending dividends was one of the necessary elements of debt reduction.
Asset backing
The fact I like most about Persimmon is its attractive price/tangible book ratio. This figure is the king of the value ratios in my book and here, net assets stood at £1,702m with intangibles at £259m, leaving £1,444m of net tangibles.
With a fully diluted issued capital of 302.5m shares, net tangible assets per share is 477p. Compare that with the share price of 358p and you get a P/TB of 0.75, which is value territory.
Interestingly a lot of the increase in asset value came from writing back a provision to reduce the valuation in the depths of the recession. This provision is not a cash transaction but an accounting one to try and reflect the fluctuating market value of the landbank. The company holds some 59,000 plots, so is not a small business in its industry, and land price movements will consequently have quite an effect on net asset value.
Net debt at £122m makes gearing of only 7% against net assets and 8% on the tougher test against net tangibles. That is peanuts, though not as good as net cash of course. Nevertheless such low borrowings put it at the value end of the debt spectrum.
Housebuilders vs property companies
On the matter of P/TB, in case anyone feels that housebuilders resemble property companies, which normally trade at a discount to book and therefore see little attraction here, note that housebuilders are a rather different entity. The latter own large amounts of land but do so in order to develop it for residential use and then sell the completed properties.
In contrast, property companies also develop but will generally hold the commercial buildings as investments for rent. So housebuilders are more like normal trading businesses, despite their large investment in land, the latter being held as a current asset for sale.
Trading below book is thus, in my view, more of a value indicator with a housebuilder. In better times, they are unlikely to be valued at less than net assets, more probably at a premium.
The yield on the newly reinstituted dividends is at an unvalue level, with a forecast dividend of 7p for 2010 delivering a return of only around 2% at 358p.
The P/E too is unattractive at 15, on my forecast of 24p normalised eps. Both these figures should improve substantially for 2011 if the recovery continues.
Too cheap
Bottom line is I think Persimmon is too cheap on assets now that recovery is well established with increasing sales and, importantly, increasing margins too. That doesn't mean it can't go into reverse again.
In fact many, the W-shape recession believers, think the residential property market will do just that with tanking house prices, which may explain why the share is so cheap on P/TB.
Me, I don't care what anyone thinks or any of that alphabetical claptrap. The economy has only ever had one shape, an O, by which I mean it goes around in circles.
Furthermore, I am not much interested in explanations as to why a share offers value. If it does, it does. I'm right, everyone else is wrong. At least at selection.
Sometimes it works out the other way round and I get shafted. That's the risk value players take. But you have to believe, in order to buy the share at all, that you are right and the market is not.
Out goes BAE
So what to do in the portfolio? Because I decided previously it is fixed sum, a new purchase can be funded only from accumulated dividends and sales.
I have £825 in dividend cash, but that is in practice too small for me, so I need a sale in order to get a decent bite at Persimmon. I've decided to dump BAE Systems (LSE: BA), which hasn't done what I'd hoped, to raise an additional £4,482 giving me £5,307 which buys me 1,449 Persimmon at 366.3p including all costs.
That makes a loss of £516 or about 10% on BAE, though it did pay about £239 in dividends during its residence here. That helps to reduce the loss from the total return perspective on which I'm running this value portfolio. The benefits of a decent yielder, even in a trading portfolio.
Overall, the portfolio after these transactions now stands at £67,200, the start capital being £60,000.
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