Group 6 - Persimmon Analysis & Valuation

7/27/2019 Group 6 - Persimmon Analysis & Valuation

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Company Valuation and Performance

23rd March 2012

.

GROUP 6 CANDIDATE NUMBERS

13558, 47730, 47461, 49797

2012


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Contents

1) EXECUTIVE SUMMARY ....................................................................................................... 4

COMPANY &INDUSTRY ANALYSIS ......................................................................................................................... 4

FINANCIAL ANALYSIS ......................................................................................................................................... 4

ACCOUNTING ANALYSIS ..................................................................................................................................... 4VALUATION &RECOMMENDATION ....................................................................................................................... 4

2) ECONOMIC ENVIRONMENT ............................................................................................... 5

2.1) IN CONTEXT: THE UKPROPERTY MARKET ................................................................................................. 5

3) INDUSTRY ANALYSIS .......................................................................................................... 6

3.1) UKHOUSE BUILDING INDUSTRY PERFORMANCE ......................................................................................... 6

3.2) AFFORDABLE HOUSING:ROBUST FOR INDUSTRY VOLUMES............................................................................ 7

3.3) TRENDS IN THE NEW BUILD INDUSTRY...................................................................................................... 8

3.4) HOUSE BUILDING INDUSTRY STRUCTURE AND ANALYSIS................................................................................ 9

4) BUSINESS ANALYSIS ......................................................................................................... 11

4.1) STRATEGY ANALYSIS .......................................................................................................................... 11

4.2) COMPETITIVE POSITIONING ................................................................................................................. 12

4.3) SOCIAL HOUSING MIX........................................................................................................................ 12

5) SWOT ANALYSIS .............................................................................................................. 13

6) ACCOUNTING ANALYSIS .................................................................................................. 14

6.1) INTANGIBLE ASSETS ........................................................................................................................... 14

6.2) INVENTORIES ................................................................................................................................... 15

6.3) REVENUE RECOGNITION...................................................................................................................... 156.4) FORWARD CURRENCY SWAPS .............................................................................................................. 16

7) FINANCIAL ANALYSIS ....................................................................................................... 17

7.1) GROWTH ........................................................................................................................................ 17

7.2) PROFITABILITY.................................................................................................................................. 19

7.3) WORKING CAPITAL MANAGEMENT ....................................................................................................... 21

7.4) COMMON SIZE ANALYSIS ..................................................................................................................... 22

8) FORECASTING .................................................................................................................. 23

8.1) MACROECONOMIC AND INDUSTRY FACTORS ............................................................................................ 23

8.2) INDUSTRY CRITERIA ........................................................................................................................... 258.3) FORECASTING ASSUMPTIONS: .............................................................................................................. 26

8.4) TERMINAL PERIOD ASSUMPTION: ......................................................................................................... 26

9) VALUATION ..................................................................................................................... 28

9.1) VALUATION MODEL CHOSEN ............................................................................................................... 28

9.2) SENSITIVITY ANALYSIS......................................................................................................................... 29

10) INVESTMENT RECOMMENDATION .................................................................................. 31

11) APPENDICES: ................................................................................................................... 32

11.1) APPENDIX 1:STATEMENT OF FINANCIAL POSITION AT 31DECEMBER 2011(M) ............................................. 32

11.2) APPENDIX 2:CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31DECEMBER 2011(M)

33


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PersimmonAnalysis &Valuation 3 Executive Summary

11.3) APPENDIX 3:CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31DECEMBER 2011(M) ................ 34

11.4) APPENDIX 4:CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31DECEMBER 2011(M) .. 36

11.5) APPENDIX 5:REFORMULATE BALANCE SHEET (M) ................................................................................... 40

11.6) APPENDIX 6:REFORMULATED INCOME STATEMENT (M) ........................................................................... 41

11.7) APPENDIX 7:COMMON SIZE ANALYSIS OF INCOME STATEMENTVERTICAL..................................................... 43

11.8) APPENDIX 8:COMMON SIZE ANALYSIS OF INCOME STATEMENTHORIZONTAL ................................................ 45

11.9) APPENDIX 9:COMMON SIZE ANALYSIS OF BALANCE SHEET

VERTICAL........................................................... 47

11.10) APPENDIX 10:COMMON SIZE ANALYSIS OF BALANCE SHEETHORIZONTAL ................................................ 48

11.11) APPENDIX 11:RATIO ANALYSIS ........................................................................................................ 49

11.12) APPENDIX 12:FORECASTING ASSUMPTIONS........................................................................................ 51

11.13) APPENDIX 13:PRO FORMA FINANCIAL STATEMENTS (IN MILLIONS) ......................................................... 53

11.14) APPENDIX 14:VALUATION ESSENTIALS: ............................................................................................. 55

11.15) APPENDIX 15:VALUATION ASSUMPTIONS: ......................................................................................... 56

11.16) APPENDIX 16:VALUATIONCASH FLOW BASED MODELS ....................................................................... 57

11.17) APPENDIX 17:VALUATIONRESIDUAL EARNINGS MODELS: ................................................................... 59

11.18) APPENDIX 18:VALUATIONABNORMAL EARNINGS MODELS: ................................................................ 61

11.19) APPENDIX 19:MULTIPLES VALUATION............................................................................................... 6212) NOTE: .............................................................................................................................. 64

13) REFERENCES..................................................................................................................... 66


4/66PersimmonAnalysis &Valuation 4 Executive Summary

1)Executive Summary

Company & Industry Analysis

Whilst the new build market for private homes

has contracted sharply, the affordable homes

segment has demonstrated significant growth inrecent years. The UKs ongoing shortage of

housing, rising population and shrinking

household size presents a positive long term

picture for house builders, though exposure to

the European debt crisis continues to dampen

short term market prospects.

Persimmon has seen a significant shift in its

market share and dominant position since 2007.

Following the financial crisis, the UKs third

largest house builder has struggled to deliver

output volumes similar to that of its peers. A

healthy landbank and strong cost management

strategies have positioned the company relatively

well for an upward turn in the market.

Financial Analysis

Persimmon demonstrates both good growth and

profitability. Since 2007, Persimmon has

weathered the financial crisis though relatively

poorly, compared to its peers. In 2010 the sales

showed a 10.5% growth, whilst the European

sovereign debt crisis 2011 saw a 2.2%

contraction in revenue. In comparison to one of

its major peers, Taylor Wimpey, Persimmon has

a higher return on equity (6.5%). When

considering working capital management,

Persimmon has more favourable inventory

holding periods and account receivable periods.

Persimmon has considerably reduced its financial

liabilities in the past three years, which has cut

financial costs and positioned itself well to secure

cheap debt in the future.

Accounting Analysis

According to or research, we found that

intangible assets, inventories, revenue

recognition, and forward currency swaps arecrucial in Persimmons financial statements.

The policies of these accounts provide

Persimmon a huge space of flexibility,

especially in estimating NRV and testing

impairments.

Valuation & Recommendation

This report concludes the current market

price is significantly undervalued and hence

makes a buy recommendation. Near term

(from 2012) forecasting assumptions

include: no change in proportion of

operating expense over sales, all turnover

ratios; tax rate will keep on 2011 levels. Net

borrowing cost is assumed to be 6% in 2012

and decline to 3% in the following year

from 2013. Similarly, financial leverage willbe -0.2 in 2012 and -0.1 from 2013. Based

on these assumptions, the value of shares

was calculated using the direct method and

indirect method. Our chosen valuation

model and basis of recommendation is

residual earnings model using the indirect

method.


5/66PersimmonAnalysis &Valuation 5 Industry Analysis

2)Economic Environment

2.1) In Context: the UK Property MarketThe UK property market is inextricably linked to the health of the wider economy, the financial

markets and consumer confidence1. Rising incomes increase demand, house prices and stimulate the

construction industry. Whilst over the past decade, the housing industry has contributed significantlyto the health of the UKs economy: accounting for roughly 3% the total GDP. This intricate

connection between the economy and the housing market makes it highly volatile and difficult to

predict.

Following the 2007 financial crisis, the UK property market took a significant downturn. From 2007

to 2010, the number of property sales in England and Wales almost halved to 650,000 (Figure 1),

with areas in the North, Midlands and Wales seeing the greatest reduction in volume. At the same

time, the share of home occupiers renting their property increased substantially (from 31% in 2006 to

currently 35% of all dwellings rented).

AsFigure 1shows, real house prices in the

UK roughly doubled from the turn of the

millennium to the 2007 financial crisis. Since

then prices have fallen by 20%, from a high of

210,000 to a current low of 168,000. UK

interest rates have remained at record lows

during this period (0.5%) which has helped

limit the extent of the housing crash2.

Prices of New HomesIn the two years following the 2007 financial

crisis, the average price of a new build home

crashed by 20% to 187,000. The market has

since recovered slightly, but prices are still

15% lower than 2007 levels and remain below

average prices for the existing housing stock,

for the first time in 20 years.

Figure 1: Volume of Property Sales in

England and Wales

This sharp decline in prices has had a significant effect on the UKs house builders ability to operate

in profit in recent years..

Figure 2: Rate of Change of UK House Prices (adjusted for inflation)3

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1996

1998

2000

2002

2004

2006

2008

2010

TotalSales

-10%

10%

30%

50%

70%

0

50

100

150

200

250

1993 1996 1999 2002 2005 2008 2011

HousePrice(000's)



3)Industry Analysis

3.1) UK House Building Industry PerformanceThe UK new build housing market took a significant downturn following the 2007 financial crisis.

New housing completions have decreased 38% since 2006 to just 135,000 in 2010. As expected in

such difficult conditions, this drop in volume was reflected by a reduction in house builders revenue:the combined turnover of the 20 largest house builders has fallen by 32% since 2009 4.

Figure 3 Number of New Dwellings Built in UK

The decline in industry output since 2007 was caused by the UKs falling demand for new homes.

This was a result of tightening credit conditions and a lack of mortgage availability, as illustrated by

Figure 4.

Figure 4: UK Mortgage Lending Volume and Average Price

As seen above, the volume of mortgage loans approved halved following the economic crisis.

Existing mortgage holders stopped moving house and the tightening of credit conditions reduced the

number of first time buyers, who constitute approximately a third of the new build industrys

customers. Over the past decade, they have been priced out of an increasingly expensive market,

seeing their share of the mortgage market fall from 50% of all loans to 38% in 2011. As a result there

has been a significant shortage of affordable housing throughout the UK in recent years.

0

50,000

100,000

150,000

200,000

250,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Numberof Homes

Built

Social Private

0

50,000

100,000

150,000

200,000

250,000

300,000

0

500

1,000

1,500

2000 2002 2004 2006 2008 2010

AverageMortgage

Value()

MortgageLoans

(Thousands)

Loans Average price ()

-38%

on 2006



3.2)Affordable Housing: Robust for Industry VolumesFigure 3 shows the substantial change in the mix of social-private builds since 2007. The number of

privately built new dwellings fell by 46% whilst the social housing market (for housing associations

and local authorities) grew by 19%, doubling its share of the new build market to 24%.

Whilst affordable housing offers house builders lower margins (compared to private homes), the

sector has remained relatively isolated from the economic downturn. The government has comeunder increasing political pressure to deliver more affordable homes as the age of first time buyers

has risen (36 years old5) and deposit requirements for mortgages have increased. The governments

housing strategy responded by establishing various programmes to stimulate both house building and

purchasing. Following the 2007 crisis and retraction of most high LTV ratio mortgages from

conventional lenders, the government has stepped in to ensure the availability of secure, low deposit

mortgages for first time buyers. Examples of government schemes are:

National Affordable Housing Programme (20082011), 8.4bn on 155,000 homes

The Affordable Housing Programme (20112015), 4.5bn budget

FirstBuy (400m budget) 20% government loans for 5% mortgage deposits

NewBuy (launched March 2012) government backed mortgage indemnity scheme, expecting

to help 100,000 households obtain high LTV ratio mortgages (90-95%)

The New Homes Bonus(20112015, 1bn budget). Local authorities incentivised to increase

housing stock by fund matching additional council tax raised by new homes

Stamp duty freeze for first time buyers of properties under 250,000. (Till March 2012)

Such governmental support has driven growth in the affordable market. Unofficial targets aim to

deliver 170,000 new homes from 20112015. If met, this will maintain the current industry output

for the next 5 years. Affordable housing remains a critical issue on the political agenda and willcontinue to form a revenue foundation for many of the UKs house builders.



3.3)Trends in the New Build IndustryDwelling Type

In 2007, 37% of all new homes being built were flats. Growth in this segment provided a strong base

for house builders, as dense urban areas offer high margins. The segments growth was linked

strongly to prosperity however, and has since rescinded to 20%. As the economy has turned, house

builders have focused more on delivering the detached/semi-detached family homes the UK needs.

Geographic Variation

House building in the North has significantly declined in recent years to a 20% share of new housing

completions. The South & London now account for 50% of the new build market and 43% of the

affordable homes market. These areas have received 870m of government investment for affordable

housing since July 2011, more than double the 370 received in the North & Yorkshire areas.

Environmental Expectations

Government law stipulates any home built after 2016 must comply with

the Carbon Neutral level 6 of the Code for Sustainable Homes (CSH).

Prototype homes to this standard currently incur a 175,000 build

premium, more than double the cost of a normal home (RuralZed6).

Technically and financially unviable on a large scale, industry experts (Jon

Ward, Chris Trott, Arup) expect its legal enforcement in 2016 is unlikely.

For house builders however, sustainability continues to climb higher on

the agenda and developing capabilities now remains key.

0.010.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

1999 2001 2003 2005 2007 2009 2011

Terraced/Other Detached/Semi Flat

10% 37%20% 20%



3.4) House Building Industry Structure and AnalysisThe house building market in the UK is a two tier structure, with 5 firms dominating a majority of

the market (tier one) and multiple smaller firms accounting for the remainder of new builds (tier

two). On average, a house builder ranked the 620th largest by revenue will generate less than a tenth

of the market leadersrevenue. In volume terms, tier one firms completed 30% of all new dwellings inthe UK in 2011.

Figure 5: Division of the top 20 house builders revenue

Threat from Potential Entrants

To the established tier one firms, there is a minimal threat of new entrants to the marketplace.

Extremely high capital costs form a significant barrier to entry (land bank acquisition, planning costs,

design costs, high overheads and construction). Manpower, plant and equipment requirements also

limit the scope for entry. Further barriers include limited operations without a strong track record

(acquiring planning permission, health and safety issues etc.).

Environmental Entrants

As sustainability requirements for new homes increase (towards 2016), the threat from new entrants

with strong environmental capabilities will rise. Entry barriers may be lowered for these firms:

through government subsidies; tax breaks; or lighter planning regulations for new, sustainable homes.

If established players are under-qualified to meet standards, they risk losing their market position.

House Builder Rivalry

Competitive rivalry between established, major house builders is high. Brand strength and reputation

is a key driver of sales (after price). As affordable housing opportunities offer a lifeline from asluggish private market, rivalry will increase. Securing government backed mortgages will be a key

area of competition between the top three firms (Taylor Wimpey, Barratt and Persimmon). All three

firms showed 5% deposit offers on the front page of their websites. For smaller firms, rivalry for

government investment has increased (e.g. the 420m Get Britain Building fund was three times

oversubscribed).

Homeowner Bargaining Power

Individual customers purchasing a single dwelling have little or no bargaining power (geographically

varies) as there is currently a shortage of supply. Housing associations or multiple-property landlords

have a stronger position with greater purchasing power. Government bodies tending contracts forhigh volume social developments hold the strongest position.

70%of the total revenue generated by the top 20 largest house

builders came from 5 firms (by decreasing market share):

Taylor Wimpey, Barratt, Persimmon, Bellway and Berkley.

10.9bn



Bargaining Power of Construction Contractors

Suppliers generally have very low bargaining power. Most home builders contract a variety of

companies on an individual development basis. A diverse use of contractors maintains a highly

competitive market with multiple firms bidding to provide services.

Bargaining Power of Other Suppliers

Expert environmental, legal and architectural consultants have higher bargaining power as delays in

construction quickly eat away at margins: however they represent a small proportion of build cost.

Subsidised Competition to the House Building Industry

The conversion of vacant properties into new dwellings represents the largest substitute to the

industry. Around 3% of the UKs housing stock (730,000 homes) stand vacant. Government

programmes (100m Empty Homes and 50m Clusters of Empty Homes) are driving for more

conversions to address the housing shortage. In the long term, growth of the prefabricated (factory

built) housing sector represents a slight threat, but remains an immature market.

Market Risk

Exposure to risks, beyond the economic factors affecting the price and demand of the exisitinghousing stock, include:

Shortage of land supply: house builders face increasing compeition to secure land withresidential planning permission at viable prices

Regulatory risk: environmental, planning and health and safety legislation can cause significantdelays in land development, incuring significant costs

Capital access: as a capital intensive industry, exposure to capital markets remains high

Reputational risk: a serious product failure, resulting in injury or significant environmentaldamage could be terminal for a house builder, should their brands reputation be damangedsignificantly

Image: Notting Hill Housing Association


11/66PersimmonAnalysis &Valuation 11 Business Analysis

4)Business Analysis

Persimmon Plc. is the currently third largest home builder in the UK by annual revenue and annual

completions. Persimmon owns three distinct subsidiaries: Persimmon Homes, Charles Church andWestbury Partnerships. Across these brands it delivers a variety of private and social housing: from

single bed affordable flats to large, premium family homes. It firmly established itself as a major

player when floated on the London Stock Exchange in 1985 and has developed a dominant position

through large acquisitions in 1996, 2001 and 2006.

4.1) Strategy AnalysisPersimmon has set out a four part strategy to become the UKs leading house builder: cash

generation, improving margins, new site acquisitions and building sustainable homes.

Cost Leadership

Persimmon has focused on capital restructure to reduce finance costs, clear debt and improve their

ROCE in recent years. It has achieved this by selling over 20% of its landbank (previously the market

leader by size) to current levels of 63,300 plots (6.5 years of supply), which remains in-line with the

industry average of 6.2 years. Their divisional structure allowed them to dual brand the Persimmon

and Charles Church brands, helping reduce build costs through economies of scale. Conversion of

plots from a large strategic landbank provides opportunities of higher margins from cheaper land.

Landbank: Geographical Diversity

There is no data publically available on the diversity of Persimmons landbank, though divionsional

revenue in 2011 indicates the company is underweight in the growing Southern market and over-reliant on its central division. Persimmon looks to address these imbalances in their strategy report:through focused development.

Risk Mitigation & Brand Differentiation

Persimmon operate comprehensive management systems to ensure regulatory compliance and

reduction in reputational risk, however numerous legal cases of local councils against the company7

and reported health and safety infringements demonstrate reputational risk is still a valid concern.

Persimmon strives to differentiate their brand by delivering a quality service to their customers. By

comparison of the number of homes completed per NHBC Quality Award earned in 2011 (a

common metric) Persimmon is far behind competitors: Barratt 141 homes per award, Taylor Wimpey(157) and Persimmon (335).

Environmental Capability

Persimmon owns a subsidiary (Space4) that delivers sustainable building techniques (closed panel

timber frames). In 2011, Space4 had the capacity to serve 17% of Persimmons completions and

continues to show strong growth of 25-30% per year. SAP ratings are in line with competition,

however only 13% of completions met any CSH requirements (level 1 minimum), which indicates a

poor commitment to developing their environmental build capability, leaving Persimmon badly

positioned for future regulation.



4.2) Competitive PositioningFigure 6 illustrates the significant shift in Persimmons market position since 2007. Whilst Persimmon

was directly competing with Barratt and Taylor Wimpey is 2007, it has lost significant ground since

the economic downturn; in terms of volume, selling price and revenue.

Figure 6: Revenue, Volume and Average House Prices of the 5 largest house builders (tier one)

From 20072010 Persimmons market share fell from 7% to 4%, of a market that contracted

by 46%.

Figure 8illustrates a 65% fall in Persimmons completions, far beyond its 4 major competitors, who

have seen their sales volume decline by only 29% on average.

4.3) Social Housing MixPersimmons believes demand for social

housing will continue to be robust8 however

this is not reflected in their strategy.

Figure 7shows a mix heavily underweight to

affordable housing in comparison to itscompetitors, who have geared their output to the

social sector in recent years. Conversely, 4% of

Persimmons completions were affordable in

2011, down from 7% in 2007.

Figure 7: 2011 mix of affordable homes Figure 8: performance 20072011

1,570 2,603

2,035768 3,015

4,714

3,046

743

130,000

150,000

170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

- 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

AverageHousePrice

Homes Sold

Persimmon Taylor Wimpey Barratt Bellway

Persimmon '07 Taylor Wimpey '07 Barratt '07 Berkeley

-70%

-60%

-50%

-40%

-30%

-20%

-10%0%

10%Persimmon

Barratt

TaylorWimpey

Revenue (m) Completions

Average Price ()

23%18%

Persimmon Barratt

Taylor Wimpy

4%

Circle radius

proportional to

2011 revenue (m)



5)SWOT Analysis

Weaknesses

Dependent on contracting

private market

Geographically skewed, not

capitalising on growing

southern markets.

Poor apparent application of

sustainable build techniques

Seeming lack of appetite for

large affordable housing

Strengths

Healthy landbank (6.5yrs)

Very low debt

Good cost leadership through

divisional structure

Combined strength of Charles

Church and Persimmon brands

Strong beta (1.1) compared to

rivals (>2)

Threats

General market contraction

Falling house prices

Reputational threats, numerous

court cases and health & safety

failures in recent years

Lost significant market share in

3 years

Performance in recession

considerably worse than peers

Opportunities

Space4 subsidiary

demonstrating strong,

consistent growth in a rapidly

expanding market

Achieved largest FirstBuy

allocation of any house builder

Good strategic landbank

position


14/66PersimmonAnalysis &Valuation 14 Accounting Analysis

6)Accounting analysis

Evaluating a companys accounting treatments is the first step in understanding its financial

statements. In general, Persimmon prepares its financial statements in compliance with IFRS on a

historical cost basis. We identified four key accounting policies in accordance with the nature of the

house building industry and Persimmons operations, namely intangible assets; inventories; revenue

recognition; and forward currency swaps. These policies were compared to one of Persimmons

major competitors, Taylor Wimpey.

6.1) Intangible AssetsIntangible assets (predominantly goodwill and brands) account for 10% of the total operating assetsin Persimmons balance sheet as 31st December 2011. Persimmon recognises goodwill, applying

IFRS3, when combining other companies as its subsidiaries. The amount is the difference between

the cost of acquisition and the fair value of the acquired entitys identifiable assets and liabilities.

Brand intangible assets, according to IAS38, result from acquisitions and cannot be internally

generated. The brands are recognised on a discounted cash flow basis and are not amortised.

However, Persimmon assumes that the value of the brands is maintained indefinitely; a straight-line

basis is used to calculate the definite-life brand intangibles.

Goodwill and brand intangibles are subsequently measured at cost less any accumulated impairment

losses which are assessed by Persimmon on each reporting date (IAS36). Persimmon assesses

impairment using discount factors, such as the implicit pre-tax rate of similar assets and the pre-tax

weighted average cost of capital. Persimmon recognises impairment losses immediately in the

statement of comprehensive income.

When determining the level of Persimmon demonstrates flexibility. The company decides the

durability of the brand intangibles using different factors, for example: competitive and economic

situations. When testing impairment, discount factors are also determined by Persimmon as well.

According to TaylorWimpeys accounting policies, goodwill is allocated as cash-generating units

when testing impairment. This method is more reasonable than Persimmons, as not all units of the

company can be benefit from goodwill. In addition, Taylor may test impairment more than once a

year, when there are some indicators relating to cash-generating units may be impaired. Thus, in

comparison with Taylors accounting policies of intangible assets, Persimmons policies are relativelyaggressive as its impairment may be underestimated.



6.2) InventoriesInventories, including land, work in progress, part exchange properties and show houses, as the

biggest portion of total operating assets, are measured at the lower of cost and net realizable value

(NRV). Land is recorded at discounted cost and work in progress contains the costs of direct

materials, labours and other related charges. NRV is calculated by the estimation of selling prices less

all estimated costs of completion and the estimated costs necessary to make the sale. If the costs are

less than NRV, the difference will be recognised as expenses immediately. However, if there is a

significant recovery of inventories value, Persimmon will reverse and write back previous impairment

provisions.

Persimmon has to allocate site-wide development costs between units built in the current year and in

future years due to the scale of its development. It also has to estimate costs to complete on such

development. In making these assessments, there is a degree of inherent uncertainty. This may allow

accounting flexibility. Moreover, in estimating the NRV, the estimation of likely prices, house types

and costs to completion the developments, provides accounting flexibility for Persimmon.

Taylor Wimpey uses the similar methods to measure inventories. It is noteworthy that land options

and fees are held in trade and other receivables before 2008. From 2009, the related costs are

reclassified as inventories. In order to be consistent, in the reformulated balance sheets, the amountof land options in 2006-2008 has been reclassified from trade and other receivables to inventories.

6.3) Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable and is recognised at

legal completion. The sale proceeds of part exchange properties are not included in revenue.

In TaylorWimpeys financial statements, sales revenue is recognised on a construction contract

where the outcome can be estimated reliably. Revenues and costs are recognised by reference to the

stage of completion of contract activity at the balance sheet date. This method is allowed by IAS11.

Compared to Taylor Wimpey, Persimmon seems to be conservative since it only recognises revenue

after selling and finishing legal procedures.



6.4) Forward Currency SwapsWhen financial contracts are classified into hedging instruments, they are recognised at fair value in

the balance sheet. Changes in the fair value of cash flow hedging instruments are recognised directly

in equity; changes in the fair value of a hedging instrument designated as a fair value hedge are

recognized in profit or loss.

Taylor Wimpey uses forward exchange contracts and currency swaps to hedge risks of movements in

exchange rates which primarily result from transactions and borrowings denominated in foreign

currencies: mainly US dollars, Canadian dollars and Euros. These financial instruments are regarded

as cash flows and fair value hedging items; and the accounting treatments are similar to Persimmons.


17/66PersimmonAnalysis &Valuation 17 Financial Analysis

7)Financial Analysis

Persimmons performance and trends are evaluated in this report on the basis of ratio analysis and

common size analysis. The performance of Persimmon will be compared to its largest competitor by

revenue, Taylor Wimpey.

7.1) GrowthDue to the 2007 financial crisis Persimmons income significantly decreased in 2008. However

following that period, the industry showed signs of recovery due to an increase in demand of

housing.

Annual growth rate 2007 2008 2009 2010 2011

Sales -4.0% -41.8% -19.1% 10.5% -2.2%

Net operating assets 13.9% -29.8% -13.1% -4.3% 0.3%

Shareholders' equity 15.5% -33.7% 4.4% 7.4% 5.5%

Core operating income after tax 2.0% -84.0% -20.4% 63.9% 16.6%

Operating income (after tax) 13.4% -227.7% -115.7% 63.0% -23.4%

Comprehensive income 14.9% -252.7% -109.3% 98.6% -9.9%

Figure 9: Annual growth rate of Persimmon from 2007 to 2011

From 2008 to 2010, Persimmon showed an increasing trend in sales growth, which reached 10.5% in

2010. However, in 2011 sales growth decreased by 2.2% due to the sovereign debt crisis and slowing

European economies. Compared to Taylor Wimpey, Persimmon weathered the financial crisis worse

but in the past three years has shown an improved sales growth rate.

Figure 10 Persimmons income from 2007 to 2011

-300.00%

-250.00%

-200.00%

-150.00%

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

2007 2008 2009 2010 2011core operating income

operating income

comprehensive income



Figure 11 ROE Persimmon VS Taylor Wimpey9

From Figure 11 ROE Persimmon VS Taylor Wimpeywe see the growth rate of core operating

income has increased steadily in the recent years. In 2011 whilst sales decreased by 2.2%; the core

operating income had a improved considerably by 16.6%. It is further shown that cost of sales

decreased from 1374.7 million in 2010 million to 1312 million in 2011. This trend, can thus be

explained due to a powerful cost controls enacted by Persimmons cost management strategy.

Furthermore, operating income and comprehensive income increased significantly by 63% and 98.6%

respectively in 2010. This is due to large write-downs in 2009 and 2010, when Persimmon claimed

70.4 million and 80.2 million respectively, which resulted in a high unusual operating income after

the huge reduction in inventory impairments in 2008. Based on accounting analysis, the revertedamount in inventory write-back lead to increase in assets, as the company adjusted this figure which is

based on strength of the economy. However, in 2011 the operating income after tax decreased by

23.4% which lead to a decrease in comprehensive income of 9.9%. There are two explanations for

these reductions. Firstly, the speed of house price recovery slowed in 2011, due to the European

sovereign debt crisis, which lead to a fall in sales. Secondly, together with the slightly price reduction,

there is a decrease in operating income due to the value of inventory write-back in 2011 (13.30

million), which was significantly lower compared to 2009 and 2010. This reduction in inventory

write-back could be a result of temporary aggressive accounting policy in 2009 and 2010; hence, in

2011, the company had to reduce this write-back amount to cope with the aggressive accounting in

previous years.

The growth rate of net operating asset shows an increasing trend since 2008 and finally becomes

positive in 2011.The shareholder's equity has consistently increased since 2009.This rise has occurred

as since 2008, Persimmon has been clearing its debt. The decreasing net financial obligations are the

main reason of increasing the shareholder's equity.

-0.6

-0.4

-0.2

0

0.2

0.4

2007 2008 2009 2010 2011ROE

Persimmon

Taylor Wimpey



7.2) ProfitabilityThis report focuses on the return on equity (ROE) to demonstrate the profitability of Persimmon.

The report uses both traditional and alternative approaches (DuPont decomposition). In order to

reconcile with the forecasting section, we derive an alternative approach based on the year beginning

formula.

Company time-trends Analysis

After 2008, the return on equity has remained positive for last three years. In 2011 the return on

equity was 6.5%, which is slightly lower than 7.8% in 2010. In order to explain this decrease, this

section will base on DuPont decomposition approach. From the alternative approach, it is clearly

seen that there are two main drivers that can influence this performance: return on operating assets

(RNOA) and financial leverage gain.

Firstly, in 2011 the return on net operating asset (RNOA) decreased to 6.9%, compared to 8.7% in

2010. Reliant on the decomposition of operating profit margin (PM), it reveals that this ratio

decreased from 10.4% in 2010 to 8.1% in 2011. However, at the same time, net operating assets

turnover (ATO) remained almost constant. Therefore, the main driver, which lead to the reduction in

return of net operating assets (RNOA) in 2011, is the operating profit margin (PM). It further

explains that together with the decrease in sales, the falling operating income also lessens operatingprofit margins. The core operating income margin has increased from 6.2% to 7.4%; however, the

operating income margin decreased significantly from 10.4% to 8.1%. As discussed in the growth

analysis, the decrease of operating income is mainly due to reduced inventory write-back in 2011.

The decomposition of Persimmons financial leverage gain reveals that the net borrowing cost has

been increasing in the past three years because Persimmon has been reducing its debt. In addition,

the companys financial spread has not only decreased as a result of a considerable increase in net

borrowing cost (from 14.5% to 21.8%), but also because of the falling return on net operating assets

(RNOA) from 8.7% to 6.9%. Furthermore, the financial leverage gain keeps relatively low because

the increasing return on net operating assets (RNOA) cannot offset the reduction in net borrowing

cost.



Traditional DuPont decomposition ofROE

Comprehensive income margin 14.8% -38.8% 4.5% 8.0% 7.4%

x Asset turnover 0.80 0.42 0.45 0.56 0.56

= Return on assets (ROA) 11.9% -16.4% 2.0% 4.5% 4.2%

x Financial leverage 1.85 1.77 2.03 1.72 1.56

= Return on equity 22.0% -29.0% 4.1% 7.8% 6.5%

Figure 12 Traditional DuPont decomposition of ROE

Alternative DuPont decomposition ofROE

Operating margin 16.5% -36.1% 7.0% 10.4% 8.1%

x Net operating assets turnover 1.12 0.57 0.66 0.84 0.86= Return on net operating assets(RNOA) 18.4% -20.7% 4.6% 8.7% 6.9%

- Net borrowing costs (NBC) 7.6% 6.5% 6.0% 14.5% 21.8%= Spread 10.8% -27.1% -1.4% -5.8% -14.8%

Financial leverage (FLEV) 0.33 0.31 0.39 0.15 0.03

Financial leverage gain (Spread x FLEV) 3.5% -8.4% -0.5% -0.9% -0.4%

ROE = RNOA + FLEV x Spread 22.0% -29.0% 4.1% 7.8% 6.5%

Figure 13.Alternative DuPont decomposition of ROE

Cross-sectional Comparison with Competitors

Compared to the ROE of Taylor Wimpey the performance of Persimmon demonstrates more

stability whilst Taylor Wimpey fluctuates more. Overall, from 2007 to 2011 Persimmon is doing out

performing Taylor Wimpey, except in 2010. In 2011 the performance of Persimmon and Taylor

Wimpey are relatively close to each other.

Figure 14 Return on equity Persimmon VS Taylor Wimpey

-80.00%

-70.00%

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

2007 2008 2009 2010 2011

Persimmon

Taylor Wimpey



7.3)Working Capital ManagementWorking capital managementratios

Inventory holding days 542 624 616 550 557Trade receivables collectionperiod 24 35 14 12 13

Trade payables days 135 168 152 155 160

Operating cycle 432 492 477 407 410

Figure 15 Working capital of Persimmon

Persimmons inventory hold days have been decreasing from 2008 to 2010, whilst have slightly

increased in 2011.The principle driver of change is the continuous decrease in inventory from 2008 to

2011.The inventory holding days of Persimmon and Taylor Wimpey both rose dramatically due to

the financial crisis. In 2009 and 2010, it seems that Persimmon showed an improved performance

and by 2010 Persimmon had claimed a lower inventory holding days.

Figure 16 The inventory holding days Persimmon VS Taylor Wimpey

The account receivable days dropped considerably in 2009 and continued this trend over the

following two years. Compared to Taylor Wimpey the account receivable days of Persimmon

remained lower than the past 5 years. This implies Persimmon collects its revenue more efficiently

than its competitor.

Figure 17 Account receivable days Persimmon vs Taylor Wimpey

0.00

200.00

400.00

600.00

800.00

2006 2007 2008 2009 2010

Inventory

Holding

Days

Persimmon

Taylor Wimpey

0.00

10.00

20.00

30.00

40.00

2006 2007 2008 2009 2010

Account

Receivable

Days

Persimmon

Tarlor Wimpey



7.4) Common size analysis2007 2008 2009 2010 2011

Revenue 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of sales -75.6% -84.9% -91.3% -87.6% -85.5%Operating expenses -4.0% -5.1% -5.3% -4.9% -5.1%Core operating income from sales(before tax) 21.8% 11.3% 4.1% 8.2% 10.0%

Core operating income after tax 15.4% 4.2% 4.2% 6.2% 7.4%

Operating income after tax 16.5% -36.1% 7.0% 10.4% 8.1%

Comprehensive income 14.8% -38.8% 4.5% 8.0% 7.4%

Figure 18 Common size analysis of expense and income

The cost of sales is a large proportion of the sales, which is indicative of the house building industryas it requires a large capital investment. It is clear that Persimmon has been reducing the cost of sales

following the crisis. Moreover, the operating expense is also stable and fluctuates at around 5% after

2008.This may also imply the success of the cost control strategy enforced by Persimmon in the past

three years.

The core net finance expense has decreased since 2008. Persimmon is reducing its debt following the

2007 financial crisis.

2006 2007 2008 2009 2010 2011

Net operating assets 132.70% 130.88% 138.66% 115.44% 102.84% 97.78%Net financingassets/(liabilities) -32.70% -30.88% -38.66% -15.44% -2.84% 2.22%Ordinaryshareholder equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Figure 19 Percentage of Ordinary shareholder equity

In theFigure 19, we see that the percentage of net financing liabilities had decreased form 2008 to

2010. In 2011 Persimmon got net financing assets, instead of net financial obligations. As mentioned

above, this is because Persimmon has paid almost all of its financial obligations. Furthermore, the

ordinary shareholder equity from 2006 to 2010, following net operating assets, Persimmon will pay

off their net financial obligation. Hence, the amount of ordinary shareholder equity received was

lower than net operating assets. However, in 2011, shareholder equity also received benefits from net

financial assets arising from Persimmons activities. Therefore, the value that equity received in 2011

was related to all the increasing in assets of the company. As a result, this trend could present a strong

outlook for Persimmons investors in 2011.


23/66PersimmonAnalysis &Valuation 23 Forecasting

8)Forecasting

8.1) Macroeconomic and Industry FactorsMacroeconomic Criteria

The house building industry is a major segment of the construction industry. This industry is cyclical:

customers generally have the option to delay a purchase during periods of uncertainty. Duet to this

cyclical nature, it is necessary to analyse macroeconomic factors based on long-term GDP, interest

rate, population growth and unemployment rate. There is a correlation among these economic

variables that influences the housing market.

GDPIt is predicted that the average GPD growth of UK will grow slowly to around 0.5% in 2012 and

increase significantly in the later years to around 2.3% in 201610.

Figure 20: HM Treasury figures for GDP growth rates

In addition, although the main growth remains much stronger in China, India and other large

emerging countries, the sluggish recovery of Europe economy, except Germany, and the slowdown

of America will likely push up commodities prices in 2012. This in turn will increase costs in the

house-building industry11. Moreover, as the result of the economic slowdown, it will squeeze the real

income of UKs household, which in turn influences the demand for housing.

Interest rates

The Bank of Englands Monetary Policy Committee has kept interest rates at a record low (0.5%) for

27 months in a row. It is commonly expected that interest rates will have rise by the end of 2012, as



inflation continues to remain above the Banks 2% target (CPI stood at 3.6% in February 2012)12.

Hence, it is expected that mortgage rates will increase during 2012.

Population Growth

With a steadily rising population (government projections estimate 0.7% per year, hitting 70m by

2025) overall demand for properties to either rent or buy is on the rise13.

Figure 21 UK Population Projections to 2030

Unemployment rate:

Another factor that can influence the housing market is unemployment rate. The unemployment rate

increased from around 5% before 2008 to 8%14. And, it is predicted that it will increase significantly

to around 1.52 million in 2011 to 1.8 million in 2012. The figure bellowed shows that unemployment

in the UK has increased by more than 15% since February 201115

.

Figure 22 Increase in unemployment rate since February 2011

-10%

0%

10%

20%

Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

Unemployment

Rate

(%)



8.2) Industry CriteriaShort-term Industry Outlook

Knight Frank estimates that prices will fall by about 5 percent in 2012 and increase by 2% in 2014.

After this, the industry is expected to see constant growth in prices of 4.8% from 2016 to 2020. This

positive outlook, if correct, will stimulate a growing demand for purchases 16. However, a positive

outlook from Knight Frank cannot offset bad signals from Europe economy, increasing interest rates

and rising unemployment in the UK. Hence, it is predicted that the Britains housing market fall

further in 2012.17

It is further predicted that the average growth rate of construction industry will be 1.7% each year

from 2010 to 201418. However, there is unbalance between public and private work in this industry.

Because of the pressure to control the public debt, the Government will cut budget in public sectors

like infrastructure to improve the economy. Hence, the private housing market and affordable house

will not be influenced by this tightening policy.

Long Term View of the UKs House Building Market

As a growing population increases demand for new housing, the situation is exacerbated by the

shrinking size of the average UK household (seeFigure 23): which has reduced from 2.7 in 1980 to

an average of 2.3 people per home in 2010. Like the growing population, this trend is set to continueto pressure the UKs existing housing stock. Longer term projections of the countrys demographic

suggest that by 2033 the number of single person households will have increased by 55% to 11.3

million, meaning over a third of the UKs population will live alone.

Figure 23: Projected Total Number of Household in UK (over population overlay)

15

20

25

30

35

1981 1991 2001 2008 2013 2018 2023 2028 2033

Households(millions)



8.3) Forecasting Assumptions:From the business, accounting, financial analysis with the outlook of economy and industry, the

following section details some of the reports forecasting assumptions.

8.4)Terminal Period Assumption:Firstly, we choose the forecasting horizon as 7 years, from 2012 to 2019. We predict that Persimmon

will have a high growth rate before reaching the steady stage from 2017.

Meanwhile, we assume that the sales growth of terminal value remains at 3%, which is higher than

the mean growth rate of the construction industry because we expect the average growth rate of the

house building sector is higher than the other sectors in construction industry. Furthermore, as

Persimmons beta is 1.1 (higher than market risk) the company will be more volatile when the UKs

economy changes. In addition, we expect that the long term sales growth is of terminal value,

remaining around 3%.

Moreover, we also expect the terminal ROE will be 9%, which is higher than the cost of capital

(8.27%) due to the competitive advantages of house building sector.

Sales Growth:

Due to the outlook of economy and industry forecasts for 2012, the sales growth of house industry is

expected to decrease in 2012. However, due to government stimulation of the affordable homes

market (NewBuy) we expect Persimmon to remain in a more stable position. Therefore, we assume

the sales growth of Persimmon in 2012 will decrease by 3%, which is lower than the expected

industry decline.

Also, as the short-term view of UKs house building market, the sale growth of house-building

market will increase significantly for the later year. The following table will show our assumption for

sales growth for the period 2013 to 2016.

Year 2013 2014 2015 2016

Forecasting sale growth 3% 5% 4% 3.5%

Figure 24 Sales Growth Forecasts

Moreover, because of mean reverse characteristics, after the growing period, the sales growth of

Persimmon will reverse to a mean average growth rate at 3% in 2017 and after



We also assume that proportion of other operating income to sales in 2012 and years after is 6%

because its proportion is quite stable every year.

Margins

As the our common size analysis, the proportions of cost of sales to sales range from 76% and 91%

so as we assume that this figure is about 82% for 2012 to later year. Moreover, we expect that the

ratio of operating expenses to sales account the same proportion as 2011. These above proportions

we assumed is based on the cost control strategy of Persimmon plc.

Borrowing Costs and Interest Rates

We assume that the net borrowing cost in 2012 decrease to 6% because company strategy from 2012

is un-geared the borrowing. Hence, we expect that from 2012, the net borrowing cost decrease.

However, this rate will be higher than 0% because company may still have financial expense and it

still need to pay long-term debt or long-term debt maturity dates have not come yet. Therefore, from

2013, we assume that net borrowing cost is about 3%

Together with that argument, we also expect the financial leverage will be at -0.02 in 2012 and it will

be constant at -0.01 from 2013 because Persimmon plc wants to release all the debt and keep it nearly

0% debt; however, in some special case in future, maybe the group still need to raise money from

debt activities. Hence, we assume that financial leverage is just around -0.01

Unusual items and Investment Income

Furthermore, exceptional items are material amount and it is not expected to recur. However,

intangible assets impairment is quite stable every year. Hence, for our forecasts, although intangible

asset impairment is exceptional items, we still assume the proportion of this item over sales is

constant overtime from 2012. Other unusual operating income and unusual financing income is zero

from 2012.

We also assume that joint ventures entities, which Persimmon plc invests in, grow at the same rate

with average sale growth rate of house building industry, 3%.

Tax Rate and Turnover Ratios

Effective tax rate of Persimmon plc in 2012 is assumed that it will equal the rate in 2011 and we

expect that it will be constant overtime at 26%. Lastly, with the turnover ratios, because we do not

have efficiency information about those criteria, we assume these ratios will stay the same as its

performance in 2011.


28/66PersimmonAnalysis &Valuation 28 Valuation and Recommendation

9)Valuation

9.1)Valuation Model ChosenWhen evaluating Persimmons share price, we use both direct and indirect approaches of residual

earnings model. Due to three major reasons, we believe that this valuation model is more suitable for

the company than other methods.

First, in terms of using accounting information, stock prices calculated by using residual earnings

model reflect companies past and future performance. Residual earnings model, PB and PE ratios,

are all based on accounting information from balance sheets and income statements. The former

integrates concepts of book value and earnings to assess companies equity value, and these two ideasillustrate companies past operation results and abilities to earn future profits, respectively. However,

PB and PE ratios only focus on single aspect which means that they cannot demonstrate companies

performance completely. Therefore, we believe that residual earnings model is more appropriate for

evaluating Persimmons share price than PB and PE ratios.

Secondly, the residual income also allows the re-express the discount model in term of the price to

book ratio19. Hence, based on residual earnings model, we an know the drivers of price to book ratio.

In addition, residual earnings model is derived from return on equity (ROE), cost of equity and book

value of equity. Therefore, it concentrates on the profitability and growth in investment, which are

the main criteria that investors want to focus when they evaluate the share prices. Moreover, residual

earnings model defines value based on wealth generation but not wealth distribution. This means that

the model focuses on earnings but not dividends. Persimmon is a house building company which is

mainly influenced by economic situation so that its dividend payment policies may be different year

by year. Thus, residual earnings model is suit for Persimmon while the dividends payment situations

will not affect the valuation of share price.

Furthermore, residual earnings model uses the properties of accrual system of accounting which

regard expenditures with future economic benefits as assets, and assesses companies value by these

assets. In Persimmons case, trade and other trade receivables had a considerable change from 2006

to 2011. If we use residual earnings model to evaluate its share price, the bias will decrease.

There is a small difference in the valuation between indirect and direct approaches. The former

valuation is more accurate because it uses WACC. Followed Modigliani and Miller proposition II,WACC for the firm is uninfluenced by the amount of debt or equity in the financing of the



operational assets. Hence, discounting by WACC will be more precise than using cost of equity.

Thus, the share price comes from indirect approach will be regarded as the final result.

9.2) Sensitivity analysisForecast-based Model

At the valuation date, the current share price of Persimmon is 6.82 which is lower than our

estimates 6.97, based on indirect method or the current share price is under-valued

Moreover, as our assumption for Persimmon when the firm reaches steady state, which are sales

growth constant, margin constant, asset turnover constant, financial leverage constant, all items in

Statement of Financial Position and Statement of Comprehensive will grow at the same rate as sale.

As the result, in our sensitivity analysis part of valuation, growth rate in terminal period is our variable

to construct this process.

Figure 25 Terminal Growth Rate and Indirect Method

From the result of sensitivity analysis: If we rely on indirect method, for steady state, the sales growth

should be 2.82% for terminal period to have the same price at the current. Therefore, it is quite

conservative compared to our forecasting.

Terminal growth rate 2.00% 2.50% 2.70% 2.82% 3.00%Share price as of valuation dateindirect method 6.22 6.56 6.72 6.82 6.97



Multiples Valuation

Multiples valuation is calculated based on the comparative set of top largest house-building

companies in UK. The criteria to choose these companies are they have the similar operating

activities and financial activities, and similar business risk.

The following table shows the share prices of Persimmon at 15th March 2012 based on the

comparable companies:

Mean P/B ratio 6.19

Median P/B ratio 5.7

Mean trailing P/E ratio 6.67

Median trailing P/E ratio 5.47

Mean forward P/E ratio 6.88

Median forward P/E ratio 7.26

The estimated price using mean P/B ratio and median trailing P/E ratio is much lower than actual

price of Persimmon, while using median forward P/E ratio is higher than actual price. This can be

explained by the differences in fundamental of Persimmon relative to peer group.

In addition; and assuming that trailing earnings per share, forward earnings per share and long-term

growth and are representative of a growth that adds value to the company. Hence, due to the

difference in accounting methods, leverage and dividend payout are ignored when we analyse the

fundamental drivers of PE and PB.

The PE is higher than a normal PE, which means that growth can be expected to increase in the

future. For long-term expectations, there is a negative indication, which suggests the market thinks

long term abnormal earnings growth will decrease. Hence, there is mismatch between fundamental

analysis and market analysis in term of PE.

However PB is higher than normal PB, which means that in the future the residual earnings will

increase or the ROE will increase higher than cost of equity capital, to have positive residual earnings.

Therefore, in the long-term, Persimmon still appears to be a sound investment.



10) Investment recommendation

On the basis of this reports forecasting model, we concludePersimmons current market price is

significantly undervalued to our valuation; and hence this report makes a buy or hold

recommendation. In addition, based on various analysis methods, Persimmons shares seem a sound

investment in terms of PB.

Furthermore, from multiples valuation methods, we conclude that Persimmon shares are a favourable

stock, which suggests the market is eager to buy shares in the company.


32/66PersimmonAnalysis &Valuation 32 Appendicles

11) Appendices:

11.1)Appendix 1: Statement of Financial Position at 31 December 2011( m)2006 2007 2008 2009 2010 2011 Note

AssetsNon-current assets Note 1Intangible assets OA 470.40 467.80 264.70 260.40 255.50 250.80Property, plant and equipment OA 48.90 47.80 45.10 32.00 29.10 28.70Investments accounted for usingthe equity method OA 2.80 3.20 3.90 3.30 2.80 3.00Available for sale financial assets OA 68.00 115.20 164.00Trade and other receivables OA 11.50 17.20 31.40 3.60 3.00 2.70Forward currency swaps FA 96.00 20.80 20.40Deferred tax assets OA 62.80 51.10 6.50 27.90 38.60 25.20

596.40 587.10 447.60 416.00 464.60 474.40Current AssetsInventories OA 2959.90 3386.60 2546.50 2187.80 2073.20 2003.40Trade and other receivables OA 178.70 180.20 138.20 50.20 50.00 52.80Forward currency swaps FA 20.80 - 7.10Cash and cash equivalents FA 18.90 2.10 0.80 138.00 126.80 41.00Assets held for sale OA 3.60 2.90 2.00

3157.50 3568.90 2706.30 2379.60 2260.00 2099.20Total assets 3753.90 4156.00 3153.90 2795.60 2724.60 2573.60LiabilitiesNon-current liabilitiesLoans and borrowings FL (511.00) (527.50) (571.20) (283.00) (155.50)Trade and other payables OL (96.80) (92.40) (132.00) (77.20) (122.00) (94.00)Forward currency swaps FL (94.80) (58.00)Deferred tax liabilities OL (25.90) (32.00) (26.50) (24.10) (21.80) (19.60)Retirement benefit obligation OL (103.70) (60.70) (95.30) (114.40) (98.30) (59.50)

(832.20) (770.60) (825.00) (498.70) (397.60) (173.10)

Current liabilitiesLoan and borrowings FL (70.60) (130.90) (147.60) (117.00) (48.40) (0.10)Trade and other payables OL (706.40) (749.00) (551.90) (464.50) (463.30) (482.40)Forward currency swaps FL (6.70) (10.00) (9.50)Current tax liabilities OL (106.70) (150.40) (74.20) (82.70) (71.30) (78.70)

(890.40) (1040.30) (773.70) (673.70) (583.00) (561.20)Total liabilities (1722.60) (1810.90) (1598.70) (1172.40) (980.60) (734.30)Net assets 2031.30 2345.10 1555.20 1623.20 1744.00 1839.30EquityOrdinary share capital issued 29.90 30.30 30.30 30.30 30.30 30.30Share premium 233.40 233.60 233.60 233.60 233.60 233.60Own share (5.10)Hedge reserve (4.30) 0.70 0.10 (0.40)Other non-distributable reserve 281.40 281.40 281.40 281.40 281.40 281.40Retained earnings 1496.00 1779.40 1009.80 1078.30 1198.70 1294.00Total equity 2031.30 2325.40 1555.20 1623.20 1744.00 1839.30


33/66

PersimmonAnalysis &Valuation 33 Appendicles

11.2)Appendix 2: Consolidated statement of comprehensive income for the year ended 31 December 2011(m)2006 2007 2008 2009 2010 2011 Note

Continuing operationsRevenue 3141.90 3014.90 1755.10 1420.60 1569.50 1535.00Cost of sales (2404.20) (2278.80) (2178.00) (1222.20) (1294.50) (1298.70)Gross profit 737.70 736.10 (422.90) 198.40 275.00 236.30

Other operating income 29.60 40.10 21.40 8.80 10.90 8.90 4Operating expenses (130.70) (122.30) (313.90) (78.70) (81.80) (83.30) 5Share of results of jointly controlled entities 0.70 1.00 0.80 (0.50) 0.20 -

Profit from operations 637.30 654.90 (714.60) 128.00 204.30 161.90

Finance income 0.50 1.90 10.40 4.80 13.40 14.60Finance costs (71.10) (74.10) (75.80) (55.00) (63.80) (29.30)Profit before tax 566.70 582.70 (780.00) 77.80 153.90 147.20

Tax (170.30) (169.20) 155.00 (3.70) (38.60) (38.20)Profit after tax (all attribute to equity holders of the parent) 396.40 413.50 (625.00) 74.10 115.30 109.00

Other comprehensive income/(expense)Net gain/(loss) on cash flow hedges (7.00) 11.90 (0.80) (0.80) 0.60 -

Actuarial gains/(losses) on defined benefit pension scheme (4.70) 36.10 (43.80) (29.00) 2.50 7.80Tax 3.50 (15.60) (11.30) 19.30 7.90 (3.00)Other comprehensive income/(expense) for year, net of tax (8.20) 32.40 (55.90) (10.50) 11.00 4.80

Total recognised income/ (expense) for the year 388.20 445.90 (680.90) 63.60 126.30 113.80

Earnings per shareBasic 133.8p 137.7p (208.3p) 24.7p 38.3p 36.1pDiluted 133.1p 136.8p (208.3p) 24.5p 38.1p 35.9pNon-GAAP measures-Underlying earnings per shareBasic 118.4p 138.3p 35.3p 2.1p 24.8p 36.8pDiluted 118.0p 137.6p 35.2p 2.1p 24.6p 36.5p


34/66


11.3)Appendix 3: Consolidated Cash Flow Statement for the year ended 31 December 2011(m)2006 2007 2008 2009 2010 2011

Cash flow from operating activites:

Profit/(Loss) for the year 396.4 413.5 (625.0) 74.1 115.3 109.0

Tax charge recognised in profit or loss 170.3 169.2 (155.0) 3.7 38.6 38.2

Finance income (0.5) (1.9) (4.1) (4.8) (6.0) (7.5)

Finance costs 71.1 74.1 75.8 55.0 39.2 12.4Depreciation charge 9.6 9.8 8.7 6.3 4.5 3.8

Amortisation of intangible assets 0.3 0.2 0.3 0.3 0.3 0.3Impairment of intangible assets - 2.4 1.8 4.0 4.6 4.4

Share of results of jointly controlled entities (0.7) (1.0) (0.8) 0.5 0.5 -Profit on disposal of property, plant andequipment (0.7) (1.0) (0.7) (0.6) (1.3) (0.4)

Loss on disposal of assets held for sale - - - - 0.1 -Share-based payment charge 5.3 6.0 4.4 3.6 3.4 4.2

Exceptional items - - 892.7 (74.8) (63.0) (3.5)

Other non-cash items (8.3) - (3.1) 3.5 1.5 2.5

642.8 671.3 195.0 70.8 137.7 163.4

Movements in working capital:

Decrease/(increase) in inventories 186.0 (426.7) 185.5 501.5 194.8 83.0

Decrease/(increase) in trade and other receivables 32.0 (7.2) (5.8) 24.9 5.5 7.9

Increase/(decrease) in trade and other payables (67.8) 25.6 (173.6) (164.5) 25.9 (42.6)Increase in available for sale financial assets - - (41.8) (47.2) (48.8)


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-

Cash generated from operations 793.0 263.0 201.1 390.9 316.7 162.9

Interest paid (57.6) (66.2) (67.6) (45.9) (30.1) (10.9)

Payments on cancellation of swaps - - - - (1.6) -Make-whole fees on early redemption of seniorloan notes - - - - (13.4) (15.3)Interest received 0.5 1.9 4.1 7.8 1.4 0.2

Receipts on cancellation of swaps - - - - 7.4 7.1Tax received/(paid) (146.8) (126.3) 106.2 0.3 (54.9) (22.1)

Net cash inflow from operating activities 589.1 72.4 243.8 353.1 225.5 121.9


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11.4)Appendix 4: Consolidated Statement of Changes in Equity for the year ended 31 December 2011(m)Other reserves

Ordinaryshares

SharePremiu

maccount

Ownshares

Retainedearnings Hedging

Otherreserves Total

Balance at December 31, 2005 29.5 229.2 (4.1) 1,155.4 0.6 281.4 1,692.0

Exercise of share options/share awards 0.1 4.5 (1.0) (1.4) 2.2

Scrip dividends 0.3 (0.3) 37.1 37.1

Share option charge and taxation thereon 8.5 8.5

Valuation of currency swaps and taxation thereon (4.9) (4.9)

Movement in pension deficit and taxation thereon (3.3) (3.3)

Dividends approved and paid (96.7) (96.7)

Retained profits for the year 396.4 396.4

Balance at December 31, 2006 29.9 233.4 (5.1) 1,496.0 (4.3) 281.4 2,031.3

Own share reserve transfer 5.1 (5.1) -

Exercise of share options/share awards 0.1 0.5 6.5 7.1

Scrip dividends 0.3 (0.3) 39.5 39.5Own shares purchased (25.5)


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(25.5)


Valuation of currency swaps and taxation thereon 8.3 8.3

Movement in pension deficit and taxation thereon 24.1 24.1


Other reserve movement 0.6 (3.3) (2.7)

Retained profits for the year 413.5 413.5

Balance at December 31, 2007 30.3 233.6 - 1,799.4 0.7 281.4 2,345.4

Exercise of share options/share awards 3.2 3.2

Own shares purchased (2.4) (2.4)


Valuation of currency swaps and taxation thereon (0.6) (0.6)

Movement in pension deficit and taxation thereon (55.4) (55.4)


Other reserve movement (0.6) (0.6)

Retained losses for the year (625.0) (625.0)

Balance at December 31, 2008 30.3 233.6 - 1,009.8 0.1 281.4 1,555.2


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Own shares purchased (0.2) (0.2)

Share based payments 3.6 3.6

Other reserve movement 0.8 0.8

Other comprehensive expense (10.0) (0.5) (10.5)

Retained losses for the year 74.1 74.1

Balance at December 31, 2009 30.3 233.6 - 1,078.3 (0.4) 281.4 1,623.2

Dividends on equity shares (9.0) (9.0)


Share based payments 3.6 3.6

Satisfaction of share options from own share held (0.4) (0.4)

Other comprehensive expense 10.6 0.4 11.0


Balance at December 31, 2010 30.3 233.6 - 1,198.7 - 281.4 1,744.0

Dividends on equity shares (25.6) (25.6)

Exercise of share options/share awards (1.1) (1.1)Share based payments 4.7


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4.7

Satisfaction of share options from own share held 3.5 3.5

Other comprehensive expense 4.8 4.8


Balance at December 31, 2011 30.3 233.6 - 1,294.0 - 281.4 1,839.3


40/66PersimmonAnalysis &Valuation 40 Appendicles

11.5)Appendix 5: Reformulate Balance Sheet (m)2006 2007 2008 2009 2010 2011 Note:

Net operating assetsOperating assets

Intangible assets 470.40 467.80 264.70 260.40 255.50 250.80 Note 2Property, plant and equipment 48.90 47.80 45.10 32.00 29.10 28.70Investment accounted for usingthe equity method 2.80 3.20 3.90 3.30 2.80 3.00 Note 3Available for sale financial assets - 68.00 115.20 164.00 Note 4Trade and other trade receivables 190.20 197.40 169.60 53.80 53.00 55.50Deferred tax assets 62.80 51.40 6.50 27.90 38.60 25.20Inventories 2959.90 3386.60 2546.50 2187.80 2073.20 2003.40 Note 5Assets held for sale - 3.60 2.90 2.00Total operating assets 3735.00 4154.20 3036.30 2636.80 2570.30 2532.60

Operating liabilitiesTrade and other payables 803.20 841.40 683.90 541.70 585.30 576.40Deferred tax liabilities 25.90 32.00 26.50 24.10 21.80 19.60Retirement benefit obligation 103.70 60.70 95.30 114.40 98.30 59.50Current tax liabilities 106.70 150.40 74.20 82.70 71.30 78.70Total operating liabilities 1039.50 1084.50 879.90 762.90 776.70 734.20

Net operating assets 2695.50 3069.70 2156.40 1873.90 1793.60 1798.40

Net financial obligationFinancial assetsForward currency swaps - - 116.80 20.80 27.50 0.00

Cash and cash equivalent 18.90 2.10 0.80 138.00 126.80 41.00Total financing assets 18.90 2.10 117.60 158.80 154.30 41.00

Financing obligationsLoans and borrowings (581.60) (658.40) (718.80) (400.00) (203.90) (0.10)Forward currency swaps (101.50) (68.00) - (9.50) -Total financing obligation (683.10) (726.40) (718.80) (409.50) (203.90) (0.10)

Net financingassets/(obligation) (664.20) (724.30) (601.20) (250.70) (49.60) 40.90

Ordinary shareholder equity 2031.30 2345.40 1555.20 1623.20 1744.00 1839.30


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11.6)Appendix 6: Reformulated Income Statement (m)2006 2007 2008 2009 2010 2011 Note

Revenue 3141.90 3014.90 1755.10 1420.60 1569.50 1535.00Cost of sales (2404.20) (2278.80) (1489.80) (1297.00) (1374.70) (1312.00)Gross profit 737.70 736.10 265.30 123.60 194.80 223.00Other operating income 29.60 40.10 21.40 8.80 10.90 8.90 Note 6Operating expenses (115.30) (119.90) (89.20) (74.70) (77.20) (78.90) Note 7Core operating income from sales (before

tax) 652.00 656.30 197.50 57.70 128.50 153.00

Tax as reported (170.30) (169.20) 155.00 (3.70) (38.60) (38.20)Tax on unusual operating income (4.62) (0.72) (260.18) 19.82 21.17 2.36Tax benefit from core financial expense (21.18) (21.66) (20.43) (14.06) (9.30) (1.30)Tax benefit from unusual financial expense - - 1.80 - (4.82) (2.60)Total tax on operating income (196.10) (191.58) (123.82) 2.07 (31.54) (39.74)

Core operating income from sales after taxShare of results of jointly controlled entities 0.70 1.00 0.80 (0.50) 0.20 0.00

Core operating income after tax 456.60 465.72 74.48 59.27 97.16 113.26

Unusual operating income/(expense) (net oftax)Inventory write-back/ (impairment) - - (664.10) 74.80 80.20 13.30

Asset impairment and write-offs - - (24.10) - - -Restructuring costs (15.40) - (21.90) - - - Note 8Intangible asset impairment - (2.40) (202.80) (4.00) (4.60) (4.40) Note 9Other operating income before tax (15.40) (2.40) (912.90) 70.80 75.60 8.90Tax on other operating income 4.62 0.72 260.18 (19.82) (21.17) (2.36)Other operating income after tax (10.78) (1.68) (652.72) 50.98 54.43 6.54Net gain/(loss) on cash flow hedges (7.00) 11.90 (0.80) (0.80) 0.60 -Actual gains/(losses) on defined benefit pension (4.70) 36.10 (43.80) (29.00) 2.50 7.80


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schemesDeferred tax recognised in other comprehensiveincome 3.50 (15.60) (11.30) 19.30 7.90 (3.00)Total unusual operating income/(expense) (18.98) 30.72 (708.62) 40.48 65.43 11.34

Operating income after tax 437.62 496.44 (634.14) 99.74 162.59 124.60

Net financing expenseFinance income 0.50 1.90 4.10 4.80 6.00 7.50Finance expense (71.10) (74.10) (75.80) (55.00) (39.20) (12.40)Net interest expense before tax (70.60) (72.20) (71.70) (50.20) (33.20) (4.90)Tax benefit of debt 21.18 21.66 20.43 14.06 9.30 1.30Core net financing expense after tax (49.42) (50.54) (51.27) (36.14) (23.90) (3.60)

Unusual financing income/(expense) (net oftax)Gain on cancellation of interest rate swaps - - 6.30 - 7.40 7.10Increasing in interest expense on bank overdraftsand loans - - 0.00 - (23.00) (16.90) Note 10Loss on cancellation of interest rate swaps - - 0.00 - (1.60) -Unusual financing income/(expense) - - 6.30 - (17.20) (9.80)Tax benefit of debt - - (1.80) - 4.82 2.60Total unusual financing income/(expense)(net of tax) - - 4.50 - (12.38) (7.20)

Total net financing expense (49.42) (50.54) (46.76) (36.14) (36.29) (10.80)

Comprehensive income 388.20 445.90 (680.90) 63.60 126.30 113.80

Tax rateStatutory tax rate 30% 30% 29% 28% 28% 26.5%Effective tax rate 30.0% 29.0% 27.3% 4.7% 25.1% Note 11


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11.7)Appendix 7: Common size analysis of Income Statement Vertical2006 2007 2008 2009 2010 2011 Note

Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales -76.52% -75.58% -84.88% -91.30% -87.59% -85.47%Gross profit 23.48% 24.42% 15.12% 8.70% 12.41% 14.53%Other operating income 0.94% 1.33% 1.22% 0.62% 0.69% 0.58%

Operating expenses -3.67% -3.98% -5.08% -5.26% -4.92% -5.14%Core operating income from sales (before tax) 20.75% 21.77% 11.25% 4.06% 8.19% 9.97%

Tax as reported -5.42% -5.61% 8.83% -0.26% -2.46% -2.49%Tax on unusual operating income -0.15% -0.02% -14.82% 1.40% 1.35% 0.15%Tax benefit from core financial expense -0.67% -0.72% -1.16% -0.99% -0.59% -0.08%Tax benefit from unusual financial expense - - 0.10% - -0.31% -0.17%Total tax on operating income -6.24% -6.35% -7.05% 0.15% -2.01% -2.59%

Core operating income from sales after taxShare of results of jointly controlled entities 0.02% 0.03% 0.05% -0.04% 0.01% 0.00%

Core operating income after tax 14.53% 15.45% 4.24% 4.17% 6.19% 7.38%

Unusual operating income/(expense) (net oftax)

Inventory write-back/ (impairment) - - -37.84% 5.27% 5.11% 0.87%Asset impairment and write-offs - - -1.37% - - -Restructuring costs -0.49% - -1.25% - - -Intangible asset impairment - -0.08% -11.55% -0.28% -0.29% -0.29%Other operating income before tax -0.49% -0.08% -52.01% 4.98% 4.82% 0.58%Tax on other operating income 0.15% 0.02% 14.82% -1.40% -1.35% -0.15%Other operating income after tax -0.34% -0.06% -37.19% 3.59% 3.47% 0.43%Net gain/(loss) on cash flow hedges -0.22% 0.39% -0.05% -0.06% 0.04% -


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Actual gains/(losses) on defined benefit pensionschemes -0.15% 1.20% -2.50% -2.04% 0.16% 0.51%Deferred tax recognised in other comprehensiveincome 0.11% -0.52% -0.64% 1.36% 0.50% -0.20%Total unusual operating income/(expense) -0.60% 1.02% -40.38% 2.85% 4.17% 0.74%

Operating income after tax 13.93% 16.47% -36.13% 7.02% 10.36% 8.12%

Net financing expenseFinance income 0.02% 0.06% 0.23% 0.34% 0.38% 0.49%

Finance expense -2.26% -2.46% -4.32% -3.87% -2.50% -0.81%Net interest expense before tax -2.25% -2.39% -4.09% -3.53% -2.12% -0.32%Tax benefit of debt 0.67% 0.72% 1.16% 0.99% 0.59% 0.08%Core net financing expense after tax -1.57% -1.68% -2.92% -2.54% -1.52% -0.23%

Unusual financing income/(expense) (net oftax)Gain on cancellation of interest rate swaps - - 0.36% - 0.47% 0.46%Increasing in interest expense on bank overdraftsand loans - - - - -1.47% -1.10%Loss on cancellation of interest rate swaps - - - - -0.10% -Unusual financing income/(expense) - - 0.36% - -1.10% -0.64%Tax benefit of debt - - -0.10% - 0.31% 0.17%Total unusual financing income/(expense)(net of tax) - - 0.26% - -0.79% -0.47%

Total net financing expense -1.57% -1.68% -2.66% -2.54% -2.31% -0.70%

Comprehensive income 12.36% 14.79% -38.80% 4.48% 8.05% 7.41%


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11.8)Appendix 8: Common size analysis of Income StatementHorizontal2007 2008 2009 2010 2011 Note

Revenue 100.00% 95.96% 55.86% 45.21% 49.95% 48.86%Cost of sales 100.00% 94.78% 61.97% 53.95% 57.18% 54.57%Gross profit 100.00% 99.78% 35.96% 16.75% 26.41% 30.23%Other operating income 100.00% 135.47% 72.30% 29.73% 36.82% 30.07%Operating expenses 100.00% 103.99% 77.36% 64.79% 66.96% 68.43%Core operating income from sales (before tax) 100.00% 100.66% 30.29% 8.85% 19.71% 23.47%

Tax as reported 100.00% 99.35% -91.02% 2.17% 22.67% 22.43%Tax on unusual operating income 100.00% 15.58% 5631.53% -429.09% -458.18% -51.05%Tax benefit from core financial expense 100.00% 102.27% 96.48% 66.36% 43.89% 6.13%Tax benefit from unusual financial expense - - 100.00% - -268.23% -144.64% Note 12Total tax on operating income 100.00% 97.70% 63.14% -1.05% 16.09% 20.26%

Core operating income from sales after taxShare of results of jointly controlled entities 100.00% 142.86% 114.29% -71.43% 28.57% 0.00%

Core operating income after tax 100.00% 102.00% 16.31% 12.98% 21.28% 24.81%

Unusual operating income/(expense) (net of tax)Inventory write-back/ (impairment) - 100.00% -11.26% -12.08% -2.00% Note 12

Asset impairment and write-offs - - - - -Restructuring costs 100.00% - 142.21% - - -Intangible asset impairment - 100.00% - - - -Other operating income before tax 100.00% 15.58% 5927.92% -459.74% -490.91% -57.79%Tax on other operating income 100.00% 15.58% 5631.53% -429.09% -458.18% -51.05%Other operating income after tax 100.00% 15.58% 6054.95% -472.88% -504.94% -60.68%Net gain/(loss) on cash flow hedges 100.00% -170.00% 11.43% 11.43% -8.57% -Actual gains/(losses) on defined benefit pension 100.00% -768.09% 931.91% 617.02% -53.19% -165.96%


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schemesDeferred tax recognised in other comprehensiveincome 100.00% -445.71% -322.86% 551.43% 225.71% -85.71%Total unusual operating income/(expense) 100.00% -161.85% 3733.53% -213.26% -344.74% -59.76%

Operating income after tax 100.00% 113.44% -144.91% 22.79% 37.15% 28.47%

Net financing expenseFinance income 100.00% 380.00% 820.00% 960.00% 1200.00% 1500.00%Finance expense 100.00% 104.22% 106.61% 77.36% 55.13% 17.44%

Net interest expense before tax 100.00% 102.27% 101.56% 71.10% 47.03% 6.94%Tax benefit of debt 100.00% 102.27% 96.48% 66.36% 43.89% 6.13%Core net financing expense after tax 100.00% 102.27% 103.73% 73.14% 48.37% 7.29%

Unusual financing income/(expense) (net of tax)Gain on cancellation of interest rate swaps - 100.00% - 117.46% 112.70% Note 12Increasing in interest expense on bank overdrafts andloans - - - - -Loss on cancellation of interest rate swaps - - - - -Unusal financing income/(expense) - 100.00% - -273.02% -155.56% Note 12Tax benefit of debt - 100.00% - -268.23% -144.64% Note 12Total unusual financing income/(expense) (net oftax) - 100.00% - -274.93% -159.91%

Total net financing expense 100.00% 102.27% 94.62% 73.14% 73.43% 21.86%

Comprehensive income 100.00% 114.86% -175.40% 16.38% 32.53% 29.31%

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