The Covid-19 pandemic has caused major disruption across a wide array of industries. But positive results from one vaccine drug trial suggests that we may be nearing the end. Despite this excellent news, it’s important to remember there are still many months to go before the vaccine becomes widely available. Therefore the disruption will likely continue, but maybe not for this FTSE 100 stock, I feel.
An opportunity in the FTSE 100
Persimmon (LSE:PSN) is a housebuilding and sales business. By working with local officials and landowners, the company has been able to continually acquire property on which to build as well as gain planning permission.
Unlike other builders, Persimmon also controls the manufacturing of its most vital construction materials – namely bricks, tiles and timber.
Upon the completion of a house, the sales team steps in. Operating under one of three brands – Persimmon, Charles Church, and Westbury Partnerships.
I’ve previously discussed the imbalance between demand and supply of housing in the UK. With population growth expected to reach 70bn by 2030, the need for more housing isn’t going away any time soon.
The pandemic has definitely put a dent in the firm’s performance, with operations being temporarily closed down in March. However, thanks to an enormous cash war chest of £829m, it retained all staff on full pay without any reliance on government assistance.
Since then, it’s been business as usual. New safety procedures have been put in place to ensure employees and customers remain in a Covid-free environment.
The lockdown financials
The 2020 half-year results saw quite a steep decline in several key metrics for the FTSE 100 stock.
| H1 2020 | H1 2019 | % Change | |
| New home completions | 4,900 | 7,584 | -35 |
| Average selling price | £225,056 | £216,942 | +3.7 |
| Operating profit margin | 26.6% | 31.0% | -4.4 |
| Cash | £828.9m | £832.8m | -0.5 |
| Net asset value per share | 1081.9p | 890.8p | +21 |
Most of the decline stems from the pandemic rather than any serious problem with the business itself. Therefore, I expect these declines to reverse in 2021.
The drop in home completions only further exacerbates the supply/demand imbalance. This has also likely influenced the rising average selling price of homes over the same period.
Operating profit margin has also taken a hit due to increased spending on employee and customer safety. However, the reduction is once again stemming from an exceptional instance. Even at 26.6%, the operating margin remains firmly ahead of the industry average of 24.4%.
The cash balance remains stable, and the net asset value increased by 21% in a time of industry-wide disruptions. Put together, I don’t see the business being in any immediate financial danger. This opinion also appears to be shared with the management team. They have recently confirmed that the previously postponed 2019 final dividend, will be paid on 14 December, with future dividends to be announced in March 2021.
The bottom line
Most of the fears surrounding the company have been eliminated in the most recent quarterly earnings report, I feel. Average weekly sales are up 38%, forward sales are up 43%, and customer satisfaction levels are near 90%.
All these trends suggest Persimmon is back on track. Therefore, I believe investors could soon be enjoying the 9% dividend yield that this FTSE 100 stock is famous for once again.
