UBS upgrades Persimmon to ‘buy’, says valuation is more compelling

UBS upgraded Persimmon on Friday to ‘buy’ from ‘neutral’ as it said the valuation was now more compelling.

It said that key will likely be how quickly affordability improves through lower mortgage rates.

"We expect Persimmon's shares to re-rate as it delivers site growth and margin recovery," UBS said.

The bank said it thinks the stock now discounts a too bearish scenario. It noted that Persimmon's shares are down 33% since October and trade at 1x 2025E P/TNAV (long-term average 1.6x and near a historic trough) and only price-in circa 15% adjusted long-term return on capital employed, versus a UBS estimate of 20% and a 28% average since 2000.

"We think liquidation value of the land bank is around 1,460p (over +35% upside). We now model a more cautious earnings outlook for Persimmon reflecting recent company commentary and macro conditions (mainly higher swap rates), but think that is more than priced-in", it said.

UBS said Persimmon will likely work through a vast majority of fire safety provisions over 2025/26, which should enable more cash flow optionality thereafter.

The bank said it thinks EBIT margins have troughed at around 14% in 2023/24E and can gradually improve but only models a 20 basis points increase to 14.3% in 2025 with a margin recovery path to 20% by 2030, well below peak levels of 27-31% in 2017-22.

At 1100 GMT, the shares were up 1.3% at 1,106p.