UBS upgrades Persimmon on yield potential

UBS lifted Persimmon to ‘buy’ from ‘neutral’ and raised the price target to 2,330p from 2,135p following earnings revisions and what it reckons is an underappreciated potential to return even more cash to shareholders.

The Swiss bank said that while Persimmon upped its payout per annum to 110p for the next six years, its free cash flow forecast implies the ultimate payout could be closer to 190p per annum, which would imply a “very compelling” 9.3% yield on average.

This assessment assumes the business consumes a net £1bn into capital employed over the next six years and a £500m cash buffer is retained for flexibility in what is a cyclical sector.

“Returns are exceptional and set to continue to be so Persimmon's financial metrics continue to be outstanding and are, alongside Berkeley, sector leading by a considerable margin,” it said.

In particular, it said operating margins of nearly 22%, pre-tax return on capital employed of 38% and post-tax return on equity of 25% in 2015 are “exceptional”.

“Our expectation is that these returns will continue to be generated as margins expand further (UBSE 24% 2016E and 25% 2017E) as the newly acquired land from recent years fully enters the sales mix,” it said.

UBS argued that although the total return potential of 20% on a one-year view is below the sector average of 40%, this comes at relatively low risk considering the housebuilder’s high visibility on margin improvement and lack of exposure to London, which could be riskier in a ‘Brexit’ scenario.

At 0920 GMT, Persimmon shares were up 1.8% to 2,066p.