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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
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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.
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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)
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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
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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.
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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%
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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
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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
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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.
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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)
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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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
(%)
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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)
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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)
Share option charge and taxation thereon 3.4 3.4
Valuation of currency swaps and taxation thereon 8.3 8.3
Movement in pension deficit and taxation thereon 24.1 24.1
Dividends approved and paid (153.6) (153.6)
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)
Share option charge and taxation thereon 3.7 3.7
Valuation of currency swaps and taxation thereon (0.6) (0.6)
Movement in pension deficit and taxation thereon (55.4) (55.4)
Dividends approved and paid (113.1) (113.1)
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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Exercise of share options/share awards 0.2 0.2
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)
Exercise of share options/share awards 0.3 0.3
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
Retained losses for the year 115.3 115.3
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
Retained losses for the year 109.0 109.0
Balance at December 31, 2011 30.3 233.6 - 1,294.0 - 281.4 1,839.3
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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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