Group 6 - Persimmon Analysis & Valuation

Company Valuation and Performance
23rd March 2012
2012
GROUP 6 CANDIDATE NUMBERS 13558, 47730, 47461, 49797
Contents
1) EXECUTIVE SUMMARY ....................................................................................................... 4 COMPANY & INDUSTRY ANALYSIS ......................................................................................................................... 4 FINANCIAL ANALYSIS ......................................................................................................................................... 4 ACCOUNTING ANALYSIS ..................................................................................................................................... 4 VALUATION & RECOMMENDATION ....................................................................................................................... 4 2) ECONOMIC ENVIRONMENT ............................................................................................... 5 2.1) 3) IN CONTEXT: THE UK PROPERTY MARKET ................................................................................................. 5
INDUSTRY ANALYSIS .......................................................................................................... 6 3.1) 3.2) 3.3) 3.4) UK HOUSE BUILDING INDUSTRY PERFORMANCE ......................................................................................... 6 AFFORDABLE HOUSING: ROBUST FOR INDUSTRY VOLUMES............................................................................ 7 TRENDS IN THE NEW BUILD INDUSTRY ...................................................................................................... 8 HOUSE BUILDING INDUSTRY STRUCTURE AND ANALYSIS................................................................................ 9
4)
BUSINESS ANALYSIS ......................................................................................................... 11 4.1) 4.2) 4.3) STRATEGY ANALYSIS .......................................................................................................................... 11 COMPETITIVE POSITIONING ................................................................................................................. 12 SOCIAL HOUSING MIX ........................................................................................................................ 12
5) 6)
SWOT ANALYSIS .............................................................................................................. 13 ACCOUNTING ANALYSIS .................................................................................................. 14 6.1) 6.2) 6.3) 6.4) INTANGIBLE ASSETS ........................................................................................................................... 14 INVENTORIES ................................................................................................................................... 15 REVENUE RECOGNITION ...................................................................................................................... 15 FORWARD CURRENCY SWAPS .............................................................................................................. 16
7)
FINANCIAL ANALYSIS ....................................................................................................... 17 7.1) 7.2) 7.3) 7.4) GROWTH ........................................................................................................................................ 17 PROFITABILITY .................................................................................................................................. 19 WORKING CAPITAL MANAGEMENT ....................................................................................................... 21 COMMON SIZE ANALYSIS ..................................................................................................................... 22
8)
FORECASTING .................................................................................................................. 23 8.1) 8.2) 8.3) 8.4) MACROECONOMIC AND INDUSTRY FACTORS ............................................................................................ 23 INDUSTRY CRITERIA ........................................................................................................................... 25 FORECASTING ASSUMPTIONS: .............................................................................................................. 26 TERMINAL PERIOD ASSUMPTION: ......................................................................................................... 26
9)
VALUATION ..................................................................................................................... 28 9.1) 9.2) VALUATION MODEL CHOSEN ............................................................................................................... 28 SENSITIVITY ANALYSIS ......................................................................................................................... 29
10) 11)
INVESTMENT RECOMMENDATION .................................................................................. 31 APPENDICES: ................................................................................................................... 32 APPENDIX 1: STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2011( M) ............................................. 32 APPENDIX 2: CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2011(M) 33
11.1) 11.2)
11.3) 11.4) 11.5) 11.6) 11.7) 11.8) 11.9) 11.10) 11.11) 11.12) 11.13) 11.14) 11.15) 11.16) 11.17) 11.18) 11.19) 12) 13)
APPENDIX 3: CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2011(M) ................ 34 APPENDIX 4: CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2011(M) .. 36 APPENDIX 5: REFORMULATE BALANCE SHEET (M) ................................................................................... 40 APPENDIX 6: REFORMULATED INCOME STATEMENT (M) ........................................................................... 41 APPENDIX 7: COMMON SIZE ANALYSIS OF INCOME STATEMENT VERTICAL..................................................... 43 APPENDIX 8: COMMON SIZE ANALYSIS OF INCOME STATEMENT HORIZONTAL ................................................ 45 APPENDIX 9: COMMON SIZE ANALYSIS OF BALANCE SHEET VERTICAL ........................................................... 47 APPENDIX 10: COMMON SIZE ANALYSIS OF BALANCE SHEET HORIZONTAL ................................................ 48 APPENDIX 11: RATIO ANALYSIS ........................................................................................................ 49 APPENDIX 12: FORECASTING ASSUMPTIONS ........................................................................................ 51 APPENDIX 13: PRO FORMA FINANCIAL STATEMENTS (IN MILLIONS) ......................................................... 53 APPENDIX 14: VALUATION ESSENTIALS: ............................................................................................. 55 APPENDIX 15: VALUATION ASSUMPTIONS: ......................................................................................... 56 APPENDIX 16: VALUATION CASH FLOW BASED MODELS ....................................................................... 57 APPENDIX 17: VALUATION RESIDUAL EARNINGS MODELS: ................................................................... 59 APPENDIX 18: VALUATION ABNORMAL EARNINGS MODELS: ................................................................ 61 APPENDIX 19: MULTIPLES VALUATION ............................................................................................... 62
NOTE: .............................................................................................................................. 64 REFERENCES..................................................................................................................... 66
Persimmon Analysis & Valuation
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 in recent 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.
Accounting Analysis
According to or research, we found that intangible assets, inventories, revenue recognition, and forward currency swaps are crucial 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 will be -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.
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.
Executive Summary
2) Economic Environment
2.1) In Context: the UK Property Market
The 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 significantly to 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). As Figure 1 shows, 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 Homes In 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.
1,400,000 1,200,000 1,000,000 Total Sales 800,000 600,000 400,000 200,000 0
1998
1996
2000
2002
2004
2006
2008
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..
House Price (000's) 250 200 70% 50% 30% 10% 1996 1999 2002 2005 2008 -10% 2011
150
100 50 0 1993
Figure 2: Rate of Change of UK House Prices (adjusted for inflation)3
Industry Analysis
2010
3) Industry Analysis
3.1) UK House Building Industry Performance
The 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.
250,000 200,000 Number 150,000 of Homes Built 100,000 50,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Social Private
-38% on 2006
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.
1,500 Mortgage 1,000 Loans (Thousands) 500 0 2000 2002 2004 Loans 2006 2008 2010 Average price () 300,000 250,000 200,000 Average Mortgage 150,000 Value 100,000 () 50,000 0
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.
Industry Analysis
3.2) Affordable Housing: Robust for Industry Volumes

Figure 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 come under 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 (2008 2011), 8.4bn on 155,000 homes The Affordable Housing Programme (2011 2015), 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(2011 2015, 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 2011 2015. 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 will continue to form a revenue foundation for many of the UKs house builders.
Industry Analysis
3.3) Trends in the New Build Industry

Dwelling 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.
100.0 10% 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1999
20%
37%
20%
2001
2003 Terraced/Other
2005 Detached/Semi
2007 Flat
2009
2011
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.
Industry Analysis
3.4) House Building Industry Structure and Analysis

The 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 leaders revenue. In volume terms, tier one firms completed 30% of all new dwellings in the UK in 2011.
70%
10.9bn
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.
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 a sluggish 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 for high volume social developments hold the strongest position.
Industry Analysis
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 exisiting housing stock, include: Shortage of land supply: house builders face increasing compeition to secure land with residential planning permission at viable prices Regulatory risk: environmental, planning and health and safety legislation can cause significant delays 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 environmental damage could be terminal for a house builder, should their brands reputation be damanged significantly
Image: Notting Hill Housing Association
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Industry 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 and Westbury 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 Analysis

Persimmon 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, tho ugh divionsional revenue in 2011 indicates the company is underweight in the growing Southern market and overreliant 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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Business Analysis
4.2) Competitive Positioning

Figure 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.
310,000 290,000 270,000 250,000 Average 230,000 House Price 210,000 190,000 170,000 150,000 130,000 2,000 4,000 6,000 1,570 2,603 3,046 743
Circle radius proportional to 2011 revenue (m)

4,714 768 2,035 3,015
8,000 10,000 12,000 14,000 16,000 18,000 Homes Sold Barratt Barratt '07 Bellway Berkeley
Persimmon Persimmon '07
Taylor Wimpey Taylor Wimpey '07
Figure 6: Revenue, Volume and Average House Prices of the 5 largest house builders (tier one) From 2007 2010 Persimmons market share fell from 7% to 4%, of a market that contracted by 46%. Figure 8 illustrates 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 Mix

Persimmons believes demand for social housing will continue to be robust8 however this is not reflected in their strategy. Figure 7 shows a mix heavily underweight to affordable housing in comparison to its competitors, 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.
Persimmon
4% 18%
Persimmon Taylor Wimpey
Barratt
10% 0% -10% -20% -30% -40% -50% -60% -70%
23%
Revenue (m) Average Price ()
Taylor Wimpy
Figure 7: 2011 mix of affordable homes
Figure 8: performance 2007 2011
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Barratt
Completions
Business Analysis
5) SWOT Analysis
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)
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 projects
Opportunities
Space4 subsidiary demonstrating strong, consistent growth in a rapidly expanding market Achieved largest FirstBuy allocation of any house builder Good strategic landbank position
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
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Business 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 Assets

Intangible assets (predominantly goodwill and brands) account for 10% of the total operating assets in 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 Taylor Wimpeys 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, Persimmon s policies are relatively aggressive as its impairment may be underestimated.
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Accounting Analysis
6.2) Inventories
Inventories, 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 amount of land options in 2006-2008 has been reclassified from trade and other receivables to inventories.
6.3) Revenue recognition

Revenue 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 Taylor Wimpeys 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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Accounting Analysis
6.4) Forward Currency Swaps

When 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 Persimmon s.
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Accounting 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) Growth
Due 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 -19.1% -13.1% 4.4% -20.4% -115.7% -109.3% 2010 10.5% -4.3% 7.4% 63.9% 63.0% 98.6% 2011 -2.2% 0.3% 5.5% 16.6% -23.4% -9.9%
Sales -4.0% -41.8% Net operating assets 13.9% -29.8% Shareholders' equity 15.5% -33.7% Core operating income after tax 2.0% -84.0% Operating income (after tax) 13.4% -227.7% Comprehensive income 14.9% -252.7% 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.
150.00% 100.00% 50.00% 0.00% -50.00% -100.00% -150.00% -200.00% -250.00% -300.00% core operating income operating income comprehensive income
2007 2008 2009 2010 2011
Figure 10 Persimmons income from 2007 to 2011
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Financial Analysis
0.4 0.2 0 ROE
Persimmon
2007 2008 2009 2010 2011 Taylor Wimpey
-0.2
-0.4 -0.6
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 reverted amount 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.
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Financial Analysis
7.2) Profitability
This 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 operating profit 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 fin ancial 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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Financial Analysis
Traditional DuPont decomposition of ROE Comprehensive income margin x Asset turnover = Return on assets (ROA) x Financial leverage = Return on equity Figure 12 Traditional DuPont decomposition of ROE Alternative DuPont decomposition of ROE Operating margin x Net operating assets turnover = Return on net operating assets (RNOA) - Net borrowing costs (NBC) = Spread Financial leverage (FLEV) Financial leverage gain (Spread x FLEV) ROE = RNOA + FLEV x Spread
14.8% 0.80 11.9% 1.85 22.0%
-38.8% 0.42 -16.4% 1.77 -29.0%
4.5% 0.45 2.0% 2.03 4.1%
8.0% 0.56 4.5% 1.72 7.8%
7.4% 0.56 4.2% 1.56 6.5%
16.5% 1.12 18.4% 7.6% 10.8% 0.33 3.5% 22.0%
-36.1% 0.57 -20.7% 6.5% -27.1% 0.31 -8.4% -29.0%
7.0% 10.4% 0.66 0.84 4.6% 8.7% 6.0% 14.5% -1.4% -5.8% 0.39 0.15 -0.5% -0.9% 4.1% 7.8%
8.1% 0.86 6.9% 21.8% -14.8% 0.03 -0.4% 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.
30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% -40.00% -50.00% -60.00% -70.00% -80.00% 2007 2008 2009 2010 2011 Persimmon Taylor Wimpey
Figure 14 Return on equity Persimmon VS Taylor Wimpey
20
Financial Analysis
7.3) Working Capital Management

Working capital management ratios Inventory holding days Trade receivables collection period Trade payables days Operating cycle Figure 15 Working capital of Persimmon
542 24 135 432
624 35 168 492
616 14 152 477
550 12 155 407
557 13 160 410
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.
800.00 600.00 Inventory Holding 400.00 Days 200.00 0.00 2006 2007 2008 2009 2010
Persimmon Taylor Wimpey
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.
40.00 30.00 Account Receivable 20.00 Days 10.00 0.00 2006 2007 2008 2009 2010
Persimmon Tarlor Wimpey
Figure 17 Account receivable days Persimmon vs Taylor Wimpey
21
Financial Analysis
7.4) Common size analysis

Revenue Cost of sales Operating expenses Core operating income from sales (before tax) 2007 100.0% -75.6% -4.0% 21.8% 2008 100.0% -84.9% -5.1% 11.3% 2009 100.0% -91.3% -5.3% 4.1% 4.2% 7.0% 4.5% 2010 100.0% -87.6% -4.9% 8.2% 6.2% 10.4% 8.0% 2011 100.0% -85.5% -5.1% 10.0% 7.4% 8.1% 7.4%
Core operating income after tax 15.4% 4.2% Operating income after tax 16.5% -36.1% Comprehensive income 14.8% -38.8% 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 industry as 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 financing assets/(liabilities) -32.70% -30.88% -38.66% -15.44% -2.84% 2.22% Ordinary shareholder equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Figure 19 Percentage of Ordinary shareholder equity In the Figure 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.
22
Financial Analysis
8) Forecasting
8.1) Macroeconomic and Industry Factors
Macroeconomic 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. GDP It 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 2016 10.
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
23
Forecasting
inflation continues to remain above the Banks 2% target (CPI stood at 3.6% in February 201 2)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.
20% Unemployment 10% Rate (%) 0% Mar-11 -10% May-11 Jul-11 Sep-11 Nov-11 Jan-12
Figure 22 Increase in unemployment rate since February 2011
24
Forecasting
8.2) Industry Criteria

Short-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 (see Figure 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 continue to 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 .
35 30 Households 25 (millions) 20 15 1981 1991 2001 2008 2013 2018 2023 2028 2033
Figure 23: Projected Total Number of Household in UK (over population overlay)
25
Forecasting
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 Forecasting sale growth 2013 3% 2014 5% 2015 4% 2016 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
26
Forecasting
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.
27
Forecasting
9) Valuation
9.1) Valuation Model Chosen
When 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 ideas illustrate companies past operation results and abilities to earn future profits, respect ively. 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
28
Valuation and Recommendation
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 analysis

Forecast-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.
Terminal growth rate 2.00% Share price as of valuation date indirect method 6.22 Figure 25 Terminal Growth Rate and Indirect Method
2.50% 6.56
2.70% 6.72
2.82% 6.82
3.00% 6.97
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.
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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 Median P/B ratio Mean trailing P/E ratio Median trailing P/E ratio Mean forward P/E ratio Median forward P/E ratio 6.19 5.7 6.67 5.47 6.88 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 conclude Persimmons 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 Assets Non-current assets Intangible assets Property, plant and equipment Investments accounted for using the equity method Available for sale financial assets Trade and other receivables Forward currency swaps Deferred tax assets Current Assets Inventories Trade and other receivables Forward currency swaps Cash and cash equivalents Assets held for sale Total assets Liabilities Non-current liabilities Loans and borrowings Trade and other payables Forward currency swaps Deferred tax liabilities Retirement benefit obligation Current liabilities Loan and borrowings Trade and other payables Forward currency swaps Current tax liabilities Total liabilities Net assets Equity Ordinary share capital issued Share premium Own share Hedge reserve Other non-distributable reserve Retained earnings Total equity OA OA OA OA OA FA OA OA OA FA FA OA 470.40 48.90 2.80 11.50 62.80 596.40 2959.90 178.70 18.90 3157.50 3753.90 FL OL FL OL OL (511.00) (96.80) (94.80) (25.90) (103.70) (832.20) 2007 467.80 47.80 3.20 17.20 51.10 587.10 3386.60 180.20 2.10 3568.90 4156.00 (527.50) (92.40) (58.00) (32.00) (60.70) (770.60) 2008 264.70 45.10 3.90 31.40 96.00 6.50 447.60 2546.50 138.20 20.80 0.80 2706.30 3153.90 (571.20) (132.00) (26.50) (95.30) (825.00) 2009 260.40 32.00 3.30 68.00 3.60 20.80 27.90 416.00 2187.80 50.20 138.00 3.60 2379.60 2795.60 (283.00) (77.20) 2010 255.50 29.10 2.80 115.20 3.00 20.40 38.60 464.60 2073.20 50.00 7.10 126.80 2.90 2260.00 2724.60 (155.50) (122.00) 2011 250.80 28.70 3.00 164.00 2.70 25.20 474.40 2003.40 52.80 41.00 2.00 2099.20 2573.60 Note
Note 1
(94.00) (19.60) (59.50) (173.10)
(24.10) (21.80) (114.40) (98.30) (498.70) (397.60)
FL OL FL OL
(70.60) (130.90) (147.60) (117.00) (48.40) (0.10) (706.40) (749.00) (551.90) (464.50) (463.30) (482.40) (6.70) (10.00) (9.50) (106.70) (150.40) (74.20) (82.70) (71.30) (78.70) (890.40) (1040.30) (773.70) (673.70) (583.00) (561.20) (1722.60) (1810.90) (1598.70) (1172.40) (980.60) (734.30) 2031.30 2345.10 1555.20 1623.20 1744.00 1839.30 29.90 233.40 (5.10) (4.30) 281.40 1496.00 2031.30 30.30 233.60 0.70 281.40 1779.40 2325.40 30.30 233.60 0.10 281.40 1009.80 1555.20 30.30 233.60 (0.40) 281.40 1078.30 1623.20 30.30 233.60 281.40 1198.70 1744.00 30.30 233.60 281.40 1294.00 1839.30
32
Appendicles
11.2) Appendix 2: Consolidated statement of comprehensive income for the year ended 31 December 2011(m)
2006 Continuing operations Revenue Cost of sales Gross profit Other operating income Operating expenses Share of results of jointly controlled entities Profit from operations Finance income Finance costs Profit before tax Tax Profit after tax (all attribute to equity holders of the parent) Other comprehensive income/(expense) Net gain/(loss) on cash flow hedges Actuarial gains/(losses) on defined benefit pension scheme Tax Other comprehensive income/(expense) for year, net of tax Total recognised income/ (expense) for the year Earnings per share Basic Diluted Non-GAAP measures-Underlying earnings per share Basic Diluted 3141.90 (2404.20) 737.70 29.60 (130.70) 0.70 637.30 0.50 (71.10) 566.70 (170.30) 396.40 (7.00) (4.70) 3.50 (8.20) 388.20 133.8p 133.1p 118.4p 118.0p 2007 3014.90 (2278.80) 736.10 40.10 (122.30) 1.00 654.90 1.90 (74.10) 582.70 (169.20) 413.50 11.90 36.10 (15.60) 32.40 445.90 137.7p 136.8p 138.3p 137.6p 2008 1755.10 (2178.00) (422.90) 21.40 (313.90) 0.80 (714.60) 10.40 (75.80) (780.00) 155.00 (625.00) (0.80) (43.80) (11.30) (55.90) (680.90) (208.3p) (208.3p) 35.3p 35.2p 2009 1420.60 (1222.20) 198.40 8.80 (78.70) (0.50) 128.00 4.80 (55.00) 77.80 (3.70) 74.10 (0.80) (29.00) 19.30 (10.50) 63.60 24.7p 24.5p 2.1p 2.1p 2010 1569.50 (1294.50) 275.00 10.90 (81.80) 0.20 204.30 13.40 (63.80) 153.90 (38.60) 115.30 0.60 2.50 7.90 11.00 126.30 38.3p 38.1p 24.8p 24.6p 2011 1535.00 (1298.70) 236.30 8.90 4 (83.30) 5 Note
161.90 14.60 (29.30) 147.20 (38.20) 109.00
7.80 (3.00) 4.80 113.80 36.1p 35.9p 36.8p 36.5p
33
Appendicles
11.3) Appendix 3: Consolidated Cash Flow Statement for the year ended 31 December 2011(m)
2006 Cash flow from operating activites: Profit/(Loss) for the year Tax charge recognised in profit or loss Finance income Finance costs Depreciation charge Amortisation of intangible assets Impairment of intangible assets Share of results of jointly controlled entities Profit on disposal of property, plant and equipment Loss on disposal of assets held for sale Share-based payment charge Exceptional items Other non-cash items Movements in working capital: Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Increase in available for sale financial assets 186.0 32.0 (67.8) (426.7) (7.2) 25.6 185.5 (5.8) (173.6) 501.5 24.9 (164.5) (41.8) 194.8 5.5 25.9 (47.2) 83.0 7.9 (42.6) (48.8) 396.4 170.3 (0.5) 71.1 9.6 0.3 (0.7) (0.7) 5.3 (8.3) 642.8 413.5 169.2 (1.9) 74.1 9.8 0.2 2.4 (1.0) (1.0) 6.0 671.3 (625.0) (155.0) (4.1) 75.8 8.7 0.3 1.8 (0.8) (0.7) 4.4 892.7 (3.1) 195.0 74.1 3.7 (4.8) 55.0 6.3 0.3 4.0 0.5 (0.6) 3.6 (74.8) 3.5 70.8 115.3 38.6 (6.0) 39.2 4.5 0.3 4.6 0.5 (1.3) 0.1 3.4 (63.0) 1.5 137.7 109.0 38.2 (7.5) 12.4 3.8 0.3 4.4 (0.4) 4.2 (3.5) 2.5 163.4 2007 2008 2009 2010 2011
34
Appendicles
Cash generated from operations Interest paid Payments on cancellation of swaps Make-whole fees on early redemption of senior loan notes Interest received Receipts on cancellation of swaps Tax received/(paid) Net cash inflow from operating activities 793.0 (57.6) 0.5 (146.8) 589.1 263.0 (66.2) 1.9 (126.3) 72.4 (67.6) 4.1 106.2 243.8 201.1 390.9 (45.9) 7.8 0.3 353.1 316.7 (30.1) (1.6) (13.4) 1.4 7.4 (54.9) 225.5 162.9 (10.9) (15.3) 0.2 7.1 (22.1) 121.9
35
Appendicles
11.4) Appendix 4: Consolidated Statement of Changes in Equity for the year ended 31 December 2011(m)
Other reserves Ordinary shares Balance at December 31, 2005 Exercise of share options/share awards Scrip dividends Share option charge and taxation thereon Valuation of currency swaps and taxation thereon Movement in pension deficit and taxation thereon Dividends approved and paid Retained profits for the year Balance at December 31, 2006 Own share reserve transfer Exercise of share options/share awards Scrip dividends Own shares purchased 0.1 0.3 0.5 (0.3) 29.9 233.4 (5.1) 5.1 (3.3) (96.7) 396.4 1,496.0 (5.1) 6.5 39.5 (4.3) 281.4 29.5 0.1 0.3 Share Premiu m account 229.2 4.5 (0.3) Own shares (4.1) (1.0) Retained earnings 1,155.4 (1.4) 37.1 8.5 (4.9) Other reserves 281.4
Hedging 0.6
Total 1,692.0 2.2 37.1 8.5 (4.9) (3.3) (96.7) 396.4 2,031.3 7.1 39.5 (25.5)
36
Appendicles
(25.5) Share option charge and taxation thereon Valuation of currency swaps and taxation thereon Movement in pension deficit and taxation thereon Dividends approved and paid Other reserve movement Retained profits for the year Balance at December 31, 2007 Exercise of share options/share awards Own shares purchased Share option charge and taxation thereon Valuation of currency swaps and taxation thereon Movement in pension deficit and taxation thereon Dividends approved and paid Other reserve movement Retained losses for the year Balance at December 31, 2008 30.3 233.6 (55.4) (113.1) (0.6) (625.0) 1,009.8 0.1 281.4 30.3 233.6 24.1 (153.6) 0.6 413.5 1,799.4 3.2 (2.4) 3.7 (0.6) 0.7 281.4 (3.3) 3.4 8.3 3.4 8.3 24.1 (153.6) (2.7) 413.5 2,345.4 3.2 (2.4) 3.7 (0.6) (55.4) (113.1) (0.6) (625.0) 1,555.2
37
Appendicles
Exercise of share options/share awards Own shares purchased Share based payments Other reserve movement Other comprehensive expense Retained losses for the year Balance at December 31, 2009 Dividends on equity shares Exercise of share options/share awards Share based payments Satisfaction of share options from own share held Other comprehensive expense Retained losses for the year Balance at December 31, 2010 Dividends on equity shares Exercise of share options/share awards Share based payments 30.3 233.6 30.3 233.6 -
0.2 (0.2) 3.6 0.8 (10.0) 74.1 1,078.3 (9.0) 0.3 3.6 (0.4) 10.6 115.3 1,198.7 (25.6) (1.1) 281.4 0.4 (0.4) 281.4 (0.5)
0.2 (0.2) 3.6 0.8 (10.5) 74.1 1,623.2 (9.0) 0.3 3.6 (0.4) 11.0 115.3 1,744.0 (25.6) (1.1) 4.7
38
Appendicles
4.7 Satisfaction of share options from own share held Other comprehensive expense Retained losses for the year Balance at December 31, 2011 30.3 233.6 3.5 4.8 109.0 1,294.0 281.4 3.5 4.8 109.0 1,839.3
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Appendicles
11.5) Appendix 5: Reformulate Balance Sheet (m)

2006 Net operating assets Operating assets Intangible assets Property, plant and equipment Investment accounted for using the equity method Available for sale financial assets Trade and other trade receivables Deferred tax assets Inventories Assets held for sale Total operating assets Operating liabilities Trade and other payables Deferred tax liabilities Retirement benefit obligation Current tax liabilities Total operating liabilities Net operating assets Net financial obligation Financial assets Forward currency swaps Cash and cash equivalent Total financing assets Financing obligations Loans and borrowings Forward currency swaps Total financing obligation Net financing assets/(obligation) Ordinary shareholder equity 470.40 48.90 2.80 190.20 62.80 2959.90 3735.00 803.20 25.90 103.70 106.70 1039.50 2695.50 2007 467.80 47.80 3.20 197.40 51.40 3386.60 4154.20 841.40 32.00 60.70 150.40 1084.50 3069.70 2008 264.70 45.10 3.90 169.60 6.50 2546.50 3036.30 683.90 26.50 95.30 74.20 879.90 2156.40 2009 260.40 32.00 3.30 68.00 53.80 27.90 2187.80 3.60 2636.80 541.70 24.10 114.40 82.70 762.90 1873.90 2010 255.50 29.10 2.80 115.20 53.00 38.60 2073.20 2.90 2570.30 585.30 21.80 98.30 71.30 776.70 1793.60 2011 Note:
250.80 Note 2 28.70 3.00 Note 3 164.00 Note 4 55.50 25.20 2003.40 Note 5 2.00 2532.60 576.40 19.60 59.50 78.70 734.20 1798.40
18.90 18.90 (581.60) (101.50) (683.10) (664.20) 2031.30
2.10 2.10
116.80 0.80 117.60
20.80 138.00 158.80
27.50 126.80 154.30
0.00 41.00 41.00 (0.10) (0.10) 40.90 1839.30
(658.40) (718.80) (68.00) (726.40) (718.80) (724.30) 2345.40 (601.20) 1555.20
(400.00) (203.90) (9.50) (409.50) (203.90) (250.70) 1623.20 (49.60) 1744.00
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11.6) Appendix 6: Reformulated Income Statement (m)

Revenue Cost of sales Gross profit Other operating income Operating expenses Core operating income from sales (before tax) Tax as reported Tax on unusual operating income Tax benefit from core financial expense Tax benefit from unusual financial expense Total tax on operating income Core operating income from sales after tax Share of results of jointly controlled entities Core operating income after tax Unusual operating income/(expense) (net of tax) Inventory write-back/ (impairment) Asset impairment and write-offs Restructuring costs Intangible asset impairment Other operating income before tax Tax on other operating income Other operating income after tax Net gain/(loss) on cash flow hedges Actual gains/(losses) on defined benefit pension 2006 3141.90 (2404.20) 737.70 29.60 (115.30) 652.00 (170.30) (4.62) (21.18) (196.10) 0.70 456.60 2007 3014.90 (2278.80) 736.10 40.10 (119.90) 656.30 (169.20) (0.72) (21.66) (191.58) 1.00 465.72 2008 1755.10 (1489.80) 265.30 21.40 (89.20) 197.50 155.00 (260.18) (20.43) 1.80 (123.82) 0.80 74.48 2009 1420.60 (1297.00) 123.60 8.80 (74.70) 57.70 (3.70) 19.82 (14.06) 2.07 (0.50) 59.27 2010 1569.50 (1374.70) 194.80 10.90 (77.20) 128.50 (38.60) 21.17 (9.30) (4.82) (31.54) 0.20 97.16 2011 1535.00 (1312.00) 223.00 8.90 (78.90) 153.00 (38.20) 2.36 (1.30) (2.60) (39.74) 0.00 113.26 Note
Note 6 Note 7
(15.40) (15.40) 4.62 (10.78) (7.00) (4.70)
(2.40) (2.40) 0.72 (1.68) 11.90 36.10
(664.10) (24.10) (21.90) (202.80) (912.90) 260.18 (652.72) (0.80) (43.80)
74.80 (4.00) 70.80 (19.82) 50.98 (0.80) (29.00)
80.20 (4.60) 75.60 (21.17) 54.43 0.60 2.50
13.30 - Note 8 (4.40) Note 9 8.90 (2.36) 6.54 7.80
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schemes Deferred tax recognised in other comprehensive income Total unusual operating income/(expense) Operating income after tax Net financing expense Finance income Finance expense Net interest expense before tax Tax benefit of debt Core net financing expense after tax Unusual financing income/(expense) (net of tax) Gain on cancellation of interest rate swaps Increasing in interest expense on bank overdrafts and loans Loss on cancellation of interest rate swaps Unusual financing income/(expense) Tax benefit of debt Total unusual financing income/(expense) (net of tax) Total net financing expense Comprehensive income Tax rate Statutory tax rate Effective tax rate
3.50 (18.98) 437.62 0.50 (71.10) (70.60) 21.18 (49.42)
(15.60) 30.72 496.44 1.90 (74.10) (72.20) 21.66 (50.54)
(11.30) (708.62) (634.14) 4.10 (75.80) (71.70) 20.43 (51.27)
19.30 40.48 99.74 4.80 (55.00) (50.20) 14.06 (36.14)
7.90 65.43 162.59 6.00 (39.20) (33.20) 9.30 (23.90)
(3.00) 11.34 124.60 7.50 (12.40) (4.90) 1.30 (3.60)
(49.42) 388.20 30% 30.0%
(50.54) 445.90 30% 29.0%
6.30 0.00 0.00 6.30 (1.80) 4.50 (46.76) (680.90) 29% 27.3%
(36.14) 63.60 28% 4.7%
7.40 (23.00) (1.60) (17.20) 4.82 (12.38) (36.29) 126.30 28% 25.1%
7.10 (16.90) Note 10 (9.80) 2.60 (7.20) (10.80) 113.80 26.5%
Note 11
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11.7) Appendix 7: Common size analysis of Income Statement Vertical

2006 Revenue Cost of sales Gross profit Other operating income Operating expenses Core operating income from sales (before tax) Tax as reported Tax on unusual operating income Tax benefit from core financial expense Tax benefit from unusual financial expense Total tax on operating income Core operating income from sales after tax Share of results of jointly controlled entities Core operating income after tax Unusual operating income/(expense) (net of tax) Inventory write-back/ (impairment) Asset impairment and write-offs Restructuring costs Intangible asset impairment Other operating income before tax Tax on other operating income Other operating income after tax Net gain/(loss) on cash flow hedges 100.00% -76.52% 23.48% 0.94% -3.67% 20.75% -5.42% -0.15% -0.67% -6.24% 0.02% 14.53% 2007 100.00% -75.58% 24.42% 1.33% -3.98% 21.77% -5.61% -0.02% -0.72% -6.35% 0.03% 15.45% 2008 100.00% -84.88% 15.12% 1.22% -5.08% 11.25% 8.83% -14.82% -1.16% 0.10% -7.05% 0.05% 4.24% 2009 100.00% -91.30% 8.70% 0.62% -5.26% 4.06% -0.26% 1.40% -0.99% 0.15% -0.04% 4.17% 2010 100.00% -87.59% 12.41% 0.69% -4.92% 8.19% -2.46% 1.35% -0.59% -0.31% -2.01% 0.01% 6.19% 2011 Note 100.00% -85.47% 14.53% 0.58% -5.14% 9.97% -2.49% 0.15% -0.08% -0.17% -2.59% 0.00% 7.38%
-0.49% -0.49% 0.15% -0.34% -0.22%
-0.08% -0.08% 0.02% -0.06% 0.39%
-37.84% -1.37% -1.25% -11.55% -52.01% 14.82% -37.19% -0.05%
5.27% -0.28% 4.98% -1.40% 3.59% -0.06%
5.11% -0.29% 4.82% -1.35% 3.47% 0.04%
0.87% -0.29% 0.58% -0.15% 0.43% -
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Actual gains/(losses) on defined benefit pension schemes Deferred tax recognised in other comprehensive income Total unusual operating income/(expense) Operating income after tax Net financing expense Finance income Finance expense Net interest expense before tax Tax benefit of debt Core net financing expense after tax Unusual financing income/(expense) (net of tax) Gain on cancellation of interest rate swaps Increasing in interest expense on bank overdrafts and loans Loss on cancellation of interest rate swaps Unusual financing income/(expense) Tax benefit of debt Total unusual financing income/(expense) (net of tax) Total net financing expense Comprehensive income
-0.15% 0.11% -0.60% 13.93% 0.02% -2.26% -2.25% 0.67% -1.57%
1.20% -0.52% 1.02% 16.47% 0.06% -2.46% -2.39% 0.72% -1.68%
-2.50% -0.64% -40.38% -36.13% 0.23% -4.32% -4.09% 1.16% -2.92%
-2.04% 1.36% 2.85% 7.02% 0.34% -3.87% -3.53% 0.99% -2.54%
0.16% 0.50% 4.17% 10.36% 0.38% -2.50% -2.12% 0.59% -1.52%
0.51% -0.20% 0.74% 8.12% 0.49% -0.81% -0.32% 0.08% -0.23%
-1.57% 12.36%
-1.68% 14.79%
0.36% 0.36% -0.10% 0.26% -2.66% -38.80%
-2.54% 4.48%
0.47% -1.47% -0.10% -1.10% 0.31% -0.79% -2.31% 8.05%
0.46% -1.10% -0.64% 0.17% -0.47% -0.70% 7.41%
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11.8) Appendix 8: Common size analysis of Income Statement Horizontal

2007 Revenue Cost of sales Gross profit Other operating income Operating expenses Core operating income from sales (before tax) Tax as reported Tax on unusual operating income Tax benefit from core financial expense Tax benefit from unusual financial expense Total tax on operating income Core operating income from sales after tax Share of results of jointly controlled entities Core operating income after tax Unusual operating income/(expense) (net of tax) Inventory write-back/ (impairment) Asset impairment and write-offs Restructuring costs Intangible asset impairment Other operating income before tax Tax on other operating income Other operating income after tax Net gain/(loss) on cash flow hedges Actual gains/(losses) on defined benefit pension 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 95.96% 94.78% 99.78% 135.47% 103.99% 100.66% 99.35% 15.58% 102.27% 97.70% 142.86% 102.00% 100.00% 15.58% 15.58% 15.58% -170.00% -768.09% 2008 55.86% 61.97% 35.96% 72.30% 77.36% 30.29% -91.02% 5631.53% 96.48% 100.00% 63.14% 114.29% 16.31% 100.00% 142.21% 5927.92% 5631.53% 6054.95% 11.43% 931.91% 2009 45.21% 53.95% 16.75% 29.73% 64.79% 8.85% 2.17% -429.09% 66.36% -1.05% -71.43% 12.98% -11.26% -459.74% -429.09% -472.88% 11.43% 617.02% 2010 49.95% 57.18% 26.41% 36.82% 66.96% 19.71% 22.67% -458.18% 43.89% -268.23% 16.09% 28.57% 21.28% 2011 Note 48.86% 54.57% 30.23% 30.07% 68.43% 23.47% 22.43% -51.05% 6.13% -144.64% Note 12 20.26% 0.00% 24.81%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
-12.08% -2.00% Note 12 -490.91% -57.79% -458.18% -51.05% -504.94% -60.68% -8.57% -53.19% -165.96%
45
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schemes Deferred tax recognised in other comprehensive income Total unusual operating income/(expense) Operating income after tax Net financing expense Finance income Finance expense Net interest expense before tax Tax benefit of debt Core net financing expense after tax Unusual financing income/(expense) (net of tax) Gain on cancellation of interest rate swaps Increasing in interest expense on bank overdrafts and loans Loss on cancellation of interest rate swaps Unusal financing income/(expense) Tax benefit of debt Total unusual financing income/(expense) (net of tax) Total net financing expense Comprehensive income
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
-445.71% -161.85% 113.44% 380.00% 104.22% 102.27% 102.27% 102.27%
-322.86% 3733.53% -144.91% 820.00% 106.61% 101.56% 96.48% 103.73% 100.00% 100.00% 100.00% 100.00%
551.43% -213.26% 22.79% 960.00% 77.36% 71.10% 66.36% 73.14% 73.14% 16.38%
225.71% -344.74% 37.15% 1200.00% 55.13% 47.03% 43.89% 48.37% 117.46% -273.02% -268.23% -274.93% 73.43% 32.53%
-85.71% -59.76% 28.47% 1500.00% 17.44% 6.94% 6.13% 7.29% 112.70% Note 12 -155.56% Note 12 -144.64% Note 12 -159.91% 21.86% 29.31%
102.27% 114.86%
94.62% -175.40%
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11.9) Appendix 9: Common size analysis of Balance Sheet Vertical

Net operating assets Operating assets Intangible assets Property, plant and equipment Investment accounted for using the equity method Available for sale financial assets Trade and other trade receivables Deferred tax assets Inventories Assets held for sale Total operating assets Operating liabilities Trade and other payables Deferred tax liabilities Retirement benefit obligation Current tax liabilities Total operating liabilities Net financial obligation Financial assets Forward currency swaps Cash and cash equivalent Total financing assets Financing obligations Loans and borrowings Forward currency swaps Total financing obligation 2006 12.59% 1.31% 0.07% 5.09% 1.68% 79.25% 100.00% 77.27% 2.49% 9.98% 10.26% 100.00% 2007 11.26% 1.15% 0.08% 4.75% 1.24% 81.52% 100.00% 77.58% 2.95% 5.60% 13.87% 100.00% 2008 8.72% 1.49% 0.13% 5.59% 0.21% 83.87% 100.00% 77.72% 3.01% 10.83% 8.43% 100.00% 2009 9.88% 1.21% 0.13% 2.58% 2.04% 1.06% 82.97% 0.14% 100.00% 71.01% 3.16% 15.00% 10.84% 100.00% 2010 9.94% 1.13% 0.11% 4.48% 2.06% 1.50% 80.66% 0.11% 100.00% 75.36% 2.81% 12.66% 9.18% 100.00% 2011 Note 9.76% 1.12% 0.12% 6.38% 2.16% 0.98% 77.94% 0.08% 100.00% 74.21% 2.52% 7.66% 10.13% 100.00%
100.00% 100.00% 85.14% 14.86% 100.00%
100.00% 100.00% 90.64% 9.36% 100.00%
99.32% 0.68% 100.00% 100.00% 100.00%
13.10% 86.90% 100.00% 97.68% 2.32% 100.00%
17.82% 82.18% 100.00% 100.00% 100.00%
0.00% 100.00% 100.00% 100.00% 100.00%
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11.10)
Appendix 10: Common size analysis of Balance Sheet Horizontal

2006 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 2007 99.45% 97.75% 114.29% 103.79% 81.85% 114.42% 111.22% 104.76% 123.55% 58.53% 140.96% 104.33% 11.11% 11.11% 113.20% 67.00% 106.34% 113.88% 109.05% 115.46% 81.29% 85.15% 102.32% 91.90% 69.54% 84.65% 100.00% 4.23% 622.22% 123.59% 105.23% 80.00% 90.51% 76.56% 2008 56.27% 92.23% 139.29% 89.17% 10.35% 86.03% 2009 55.36% 65.44% 117.86% 100.00% 28.29% 44.43% 73.91% 100.00% 70.60% 67.44% 93.05% 110.32% 77.51% 73.39% 17.81% 730.16% 840.21% 68.78% 9.36% 59.95% 69.52% 37.74% 79.91% 2010 54.32% 59.51% 100.00% 169.41% 27.87% 61.46% 70.04% 80.56% 68.82% 72.87% 84.17% 94.79% 66.82% 74.72% 23.54% 670.90% 816.40% 35.06% 29.85% 66.54% 7.47% 85.86% 2011 Note 53.32% 58.69% 107.14% 241.18% 29.18% 40.13% 67.68% 55.56% 67.81% 71.76% 75.68% 57.38% 73.76% 70.63% 0.00% Note 12 216.93% 216.93% 0.02% 0.01% 66.72% -6.16% 90.55%
Net operating assets Operating assets Intangible assets Property, plant and equipment Investment accounted for using the equity method Available for sale financial assets Trade and other trade receivables Deferred tax assets Inventories Assets held for sale Total operating assets Operating liabilities Trade and other payables Deferred tax liabilities Retirement benefit obligation Current tax liabilities Total operating liabilities Financial assets Forward currency swaps Cash and cash equivalent Total financing assets Financing obligations Loans and borrowings Forward currency swaps Total financing obligation As percentage of OSE Net operating assets Net financing assets/(liabilities) Ordinary shareholder equity
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11.11)
Appendix 11: Ratio analysis

Definition Change in sales/ Beginning Sales Change in NOA/ Beginning NOA Change in OSE/ Beginning OSE Change in Core OI/ Beginning Core OI Change in OI/ Beginning OI Change in CI/ Beginning CI (Dividend + Repurchase)/ Comprehensive income Comprehensive Income/ Beginning OSE ROE x (1- Dividend payout) Comprehensive income/Beginning OSE Comprehensive income/Beginning total assets OI/Beginning NOA Core OI/Beginning NOA Core NFE after tax/Beginning NFO 2007 -4.0% 13.9% 15.5% 2.0% 13.4% 14.9% 39.6% 22.0% 13.3% 22.0% 11.9% 16.2% 17.3% 7.6% 2008 -41.8% -29.8% -33.7% -84.0% -227.7% -252.7% 25.4% -29.0% -21.7% -29.0% -18.6% -29.4% 2.4% 6.5% 2009 -19.1% -13.1% 4.4% -20.4% -115.7% -109.3% 0.0% 4.1% 4.1% 4.1% 2.1% 5.3% 2.7% 6.0% 2010 10.5% -4.3% 7.4% 63.9% 63.0% 98.6% 14.2% 7.8% 6.7% 7.8% 4.6% 9.1% 5.2% 14.5% 2011 -2.2% 0.3% 5.5% 16.6% -23.4% -9.9% 20.3% 6.5% 5.2% 6.5% 4.3% 6.9% 6.3% 21.8%
Annual growth rate Sales Net operating assets Shareholders' equity Core operating income after tax Operating income (after tax) Comprehensive income Dividend payout Return on equity Sustainable growth rate Performance Return on equity (ROE) Return on assets (ROA) - traditional Return on net operating assets (RNOA) alternative Core return on net operating assets (Core RNOA) Core net borrowing costs Traditional DuPont decomposition of ROE Comprehensive income margin x Asset turnover = Return on assets (ROA) x Financial leverage = Return on equity
Comprehensive income/Sales Sales/Beginning total assets Comprehensive income/Beginning total assets Beginning total assets/ Beginning SE Comprehensive income/Beginning OSE
14.8% 0.80 11.9% 1.85 22.0%
-38.8% 0.42 -16.4% 1.77 -29.0%
4.5% 0.45 2.0% 2.03 4.1%
8.0% 0.56 4.5% 1.72 7.8%
7.4% 0.56 4.2% 1.56 6.5%
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Alternative DuPont decomposition of ROE Operating margin x Net operating assets turnover = Return on net operating assets (RNOA) - Net borrowing costs (NBC) = Spread Financial leverage (FLEV) Financial leverage gain (Spread x FLEV) ROE = RNOA + FLEV x Spread Margins Core operating income margin Operating income margin Comprehensive income margin Turnover ratios Asset turnover Net operating assets turnover PPE turnover OTHER RATIOS Liquidity ratios Current ratio Acid ratio Working capital management ratios Inventory holding days Trade receivables collection period Trade payables days Operating cycle
OI/Sales Sales/Beginning NOA OI/Beginning NOA NFE/Beginning NFO RNOA - NBC Beginning NFO/Beginning SE RNOA +FLEV x Spread
16.5% 1.12 18.4% 7.6% 10.8% 0.33 3.5% 22.0%
-36.1% 0.57 -20.7% 6.5% -27.1% 0.31 -8.4% -29.0%
7.0% 0.66 4.6% 6.0% -1.4% 0.39 -0.5% 4.1%
10.4% 0.84 8.7% 14.5% -5.8% 0.15 -0.9% 7.8%
8.1% 0.86 6.9% 21.8% -14.8% 0.03 -0.4% 6.5%
Core OI/Sales OI/Sales Comprehensive income/Sales Sales/Beginning total assets Sales/Beginning NOA Sales/Beginning PPE
15.4% 16.5% 14.8% 0.80 1.12 61.65
4.2% -36.1% -38.8% 0.42 0.57 36.72
4.2% 7.0% 4.5% 0.45 0.66 31.50
6.2% 10.4% 8.0% 0.56 0.84 49.05
7.4% 8.1% 7.4% 0.56 0.86 52.75
Current Assets/ Current Liabilities (Current Assets - Inventories)/ Current Liabilities (Inventories/Cost of sales)*365 Trade receivable *365/Credit sales Trade Payables *365/ Credit Purchases
3.55 0.22 542.44 23.90 134.77 431.57
3.43 0.18 623.89 35.27 167.56 491.61
3.50 0.21 615.69 13.82 152.44 477.07
3.53 0.28 550.46 12.33 155.40 407.38
3.88 0.32 557.35 13.20 160.36 410.19
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11.12)
Appendix 12: Forecasting assumptions
Forecasts of key income statement ratios 2019E and 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E after 2020E -4.0% -41.8% -19.1% 10.5% -2.2% -2.0% 3.0% 5.0% 4.0% 3.5% 3.0% 3.0% 3.0% 3.0% 1.3% 76.5% 3.7% 80.2% 29.2% 7.6% 1.2% 0.1% 75.6% 4.0% 79.6% 62.7% 6.5% 0.6% 11.6% 84.9% 5.1% 90.0% -3.6% 6.0% 0.7% 0.3% 91.3% 5.3% 96.6% 24.5% 14.5% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 0.6% 0.3% 82.0% 4.5% 86.5% 26.0% 3.0%
Sales growth Other income ratios: Operating income Intangible asset impairment Expense ratios: Cost of sales Operating expenses Total Effective tax rate on operating income Net financial expense/Beginning NFO
87.6% 82.0% 82.0% 82.0% 82.0% 82.0% 82.0% 82.0% 4.9% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 92.5% 86.5% 86.5% 86.5% 86.5% 86.5% 86.5% 86.5% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 21.8% 6.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
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Forecasts of turnover (inverse) 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 0.016 0.027 0.032 0.020 0.019 0.019 0.019 0.019 0.019 0.019 0.019 0.019 1.299 1.930 1.793 1.394 1.351 1.351 1.351 1.351 1.351 1.351 1.351 1.351 0.24 0.24 0.25 0.29 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.27 0.48 0.48 0.35 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.01 0.03 0.04 0.25 0.02 0.03 0.09 0.24 0.02 0.07 0.05 0.28 0.02 0.07 0.05 0.13 0.01 0.06 0.05 0.03 0.01 0.06 0.05 -0.02 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01 2019E and after 2020E 0.019 0.019 1.351 1.351 0.30 0.30 0.38 0.38 0.01 0.06 0.05 -0.01 0.01 0.06 0.05 -0.01
Beginning PPE/Sales Beginning Inventories/Sales Beginning other OA/Sales Beginning trade payabes/Sales Beginning deferred tax liabilities/ Sales Beginning retirement benefit obligation/Sales Beginning current tax liability/Sales Financial leverage (Beginning NFO/Beginning NOA)
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11.13)
Appendix 13: Pro forma financial statements (in millions)

2019E and after
Pro forma financial statements 2007A Income statement Sales Other operating income Cost of sales Operating expenses Core operating income before tax Taxes Core operating income after tax Other operating income (expense) Operating income Net financial expense after tax Comprehensive income Balance sheet Property, plant and equipment Inventories Other operating assets Trade payables Current tax liabilities Deferred tax liabilities Retirement benefit obligations Net operating assets (NOA) Net financial obligations (NFO) Ordinary shareholders' equity Operating income Change in NOA Free cash flow to investors 3014.9 29.6 (2278.8) (119.9) 656.3 (191.58) 465.72 30.72 496.44 (50.54) 445.90 47.8 3386.6 719.8 841.4 150.4 32.0 60.7 3069.7 (724.3) 2345.4 496.4 374.2 122.2 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2020E 1971.0
1755.1 1420.6 1569.5 1535.0 1504.3 1549.4 1626.9 1692.0 1751.2 1803.7 40.1 21.4 8.8 10.9 8.7 9.3 9.8 10.2 10.5 10.8 (1489.8) (1297.0) (1374.7) (1312.0) (1233.5) (1270.5) (1334.1) (1387.4) (1436.0) (1479.1) (89.2) (74.7) (77.2) (78.9) (67.69) (69.72) (73.21) (76.14) (78.80) (81.17) 197.5 57.7 128.5 153.0 211.80 218.47 229.39 238.57 246.92 254.33 (123.82) 2.07 (31.54) (39.74) (55.01) (56.74) (59.58) (61.96) (64.13) (66.05) 74.48 59.27 97.16 113.26 156.79 161.73 169.82 176.61 182.79 188.27 (708.62) 40.48 65.43 11.34 (4.51) (4.65) (4.88) (5.08) (5.25) (5.41) (634.14) 99.74 162.59 124.60 152.28 157.08 164.93 171.53 177.54 182.86 (46.76) (36.14) (36.29) (10.80) 2.45 0.52 0.54 0.57 0.59 0.61 (680.90) 63.60 126.30 113.80 154.73 157.60 165.47 172.10 178.13 183.47 45.1 2546.5 444.7 683.9 74.2 26.5 95.3 2156.4 (601.2) 1555.2 (634.1) (913.3) 279.2 32.0 2187.8 417.0 541.7 82.7 24.1 114.4 1873.9 (250.7) 1623.2 99.7 (282.5) 382.2 29.1 2073.2 468.0 585.3 71.3 21.8 98.3 1793.6 (49.6) 1744.0 162.6 (80.3) 242.9 28.7 2003.4 500.5 576.4 78.7 19.6 59.5 1798.4 40.9 1839.3 124.6 4.8 119.8 28.5 2031.7 448.6 573.6 69.9 21.4 96.3 1747.6 17.5 1765.1 152.28 (50.8) 203.0 29.4 2092.7 462.0 590.8 72.0 22.0 99.2 1800.1 18.0 1818.1 157.08 52.4 104.7 30.8 2197.3 485.1 620.3 75.6 23.1 104.2 1890.1 18.9 1909.0 164.93 90.0 74.9 32.1 2285.2 504.5 645.2 78.6 24.0 108.4 1965.7 19.7 1985.3 171.53 75.6 95.9 33.2 2365.2 522.2 667.7 81.3 24.9 112.1 2034.5 20.3 2054.8 177.54 68.8 108.7 34.2 2436.2 537.8 687.8 83.8 25.6 115.5 2095.5 21.0 2116.5 182.86 61.0 121.8
1857.8 1913.6 11.1 11.5 (1523.4) (1569.1) (83.60) (86.11) 261.96 269.81 (68.03) (70.08) 193.92 199.74 (5.57) (5.74) 188.35 194.00 0.63 0.65 188.98 194.65 35.2 2509.2 554.0 708.4 86.3 26.4 119.0 2158.4 21.6 2180.0 188.35 62.9 125.5 36.3 2584.5 570.6 729.7 88.9 27.2 122.5 2223.1 22.2 2245.4 194.00 64.8 129.2
53
Appendicles
Comprehensive income Change in equity Free cash flow to equity Operating profit margin (Operating income/Sales) Net operating asset turnover (Sales/NOAt-1) RNOA (Operating PM x NOA turnover) ROE Growth in operating income Growth in comprehensive income Growth in net operating assets Growth in Ordinary shareholders' equity
445.9 314.1 131.8
(680.9) (790.2) 109.3 -36% 0.57 (0.21) -29% 227.7% 252.7% -29.8% -33.7%
63.6 68.0 (4.4) 7% 0.66 0.05 4% 115.7% 109.3% -13.1% 4.4%
126.3 120.8 5.5 10% 0.84 0.09 8% 63.0% 98.6% -4.3% 7.4%
113.8 95.3 18.5 8% 0.86 0.07 7% -23.4% -9.9% 0.3% 5.5%
154.73 (74.2) 228.91 10% 0.84 0.08 8% 22.2% 36.0% -2.8% -4.0%
157.60 53.0 104.65 10% 0.89 0.09 9% 3.2% 1.9% 3.0% 3.0%
165.47 90.9 74.57 10% 0.90 0.09 9% 5.0% 5.0% 5.0% 5.0%
172.10 76.4 95.74 10% 0.90 0.09 9% 4.0% 4.0% 4.0% 4.0%
178.13 69.5 108.64 10% 0.89 0.09 9% 3.5% 3.5% 3.5% 3.5%
183.47 61.6 121.83 10% 0.89 0.09 9% 3.0% 3.0% 3.0% 3.0%
188.98 63.5 125.48 10% 0.89 0.09 9% 3.0% 3.0% 3.0% 3.0%
194.65 65.4 129.25 10% 0.89 0.09 9% 3.0% 3.0% 3.0% 3.0%
54
Appendicles
11.14)
Appendix 14: Valuation essentials:

Book value component Net operating assets (NOA) Net financial obligations (NFO) Ordinary shareholders' equity (SE) Residual earnings components Residual operating income: OIt rf*NOAt-1 Residual net financial expense: NFEt rdNFOt-1 Residual earnings: Earnt-re*SEt-1 Present value of expected residual operating income Present value of expected residual operating income Value of net financial obligations Formula risk-free + beta*(rm-rf) NBC re*Ve/Vf + rd*Vd/Vf Note 2.36% Note 13 1.10 Source: Datastream 5.30% Research article20 8.16% 3.00% 6.82 302,369 In 000 2,060,642 40,900 2,019,742 8.27% Yahoo! Finance (15 March 2012)
Net income component Operating income (OI) Net financial expense (NFE) Earnings
Value of operations = Value of common equity = Value of operations = Discount rates Cost of capital for equity Cost of capital for debt Cost of operations
Net operating assets + Book value of common equity + Value of common equity + Denoted as re rd rf
For Persimmon plc. on 15 March 2012 Riskfree rate (T-bill rate) Beta Market risk premium (rm-risk-free) re rd Persimmon's closing price on 5 Mach, 2011 Ordinary shares outstanding (in 000) Market value of equity Market value of financial assets Market value of the firm WACC (based on market value of equity) Estimated value of equity - direct method Fair value of financial assets Estimated value of the firm WACC (based on estimated value of equity from direct methods)
Note 14
2,075, 054 40,900 2,034,154 8.27% Note 14
55
Appendicles
11.15)
Appendix 15: Valuation assumptions:

3.0% 8.27% 8.16% 302,369 Number of days passed between financial year end (31 December 2011) and the 31/12/2011 valuation date (15 March 2012) 15/03/2012 75
Assumptions Growth in terminal period Cost of operations (WACC) Cost of equity Number of shares Equivalent number of shares at valuation date Financial year end Valuation date
56
Appendicles
11.16)
Direct valuation
Appendix 16: Valuation Cash flow based models

2011A 2012E 155 (74) 229 1.0816 212 2013E 158 53 105 1.1699 89 2014E 165 91 75 1.2654 59 2015E 172 76 96 1.3687 70 2016E 178 69 109 1.4805 73 2017E 183 62 122 1.6013 76 2018E 189 63 125 1.7321 72 2503 652 1,445 2,097 2,132 7.05 7.50 2019E and after 195 65 129
Comprehensive income Change in equity Free cash flow to equity (Comprehensive income - Change in equity) Discount rate: (1 + Cost of equity) t PV of free cash flow to equity Terminal value (Free cash flows to equity/(Cost of equity - Growth)) PV of FCFE in forecasting period PV of terminal value Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price
57
Appendicles
2011A Indirect valuation Operating income Change in NOA Free cash flow to investors (operating income Change in NOA) Discount rate: (1+WACC)t PV of free cash flows Terminal value (FCF/(WACC - Growth)) PV of FCF in forecasting period PV of terminal value Value of firm from discount future value Plus: Value of financing assets Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price 626 1,407 2,033 41 2,074 2,109 6.97 7.42
2012E 152 (51) 203 1.0827 188
2013E 157 52 105 1.1722 89
2014E 165 90 75 1.2691 59
2015E 172 76 96 1.3740 70
2016E 178 69 109 1.4877 73
2017E 183 61 122 1.6107 76
2018E 188 63 125 1.7438 72
2019E and after 194 65 129
2453
Note 14
58
Appendicles
11.17)
Direct valuation
Appendix 17: Valuation Residual Earnings Models:

2011A 2012E 155 1,839 1,765 5 1.0816 4 2013E 158 1,818 14 1.1699 12 2014E 165 1,909 17 1.2654 13 2015E 172 1,985 16 1.3687 12 2016E 178 2,055 16 1.4805 11 2017E 183 2,116 16 1.6013 10 2018E 189 2,180 16 1.7321 9 323 1,839 71 187 2,097 2,132 7.05 7.50 2019E and after 195 2,245 17
Comprehensive income (CI) Ordinary shareholders' equity (OSE) Residual comprehensive income (CI - Cost of Equity x OSEt-1) Discount rate: (1 + Cost of equity) t PV of residual comprehensive income Terminal value (Residual comprehensive income/(Cost of equity - Growth)) Book value of equity PV of residual income in forecasting period PV of terminal value Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price
59
Appendicles
2011A Indirect valuation Operating income (OI) Net operating assets (NOA) Residual operating income (OI - WACC x NOAtp1) Discount rate: (1+WACC)t PV of residual operating income Terminal value (Residual operatingf income/(WACC-Growth)) Net operating assets PV of ReOI in forecasting period PV of terminal value Value of firm Plus: Value of financial asset Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price 1,798 66 169 2,033 41 2,074 2,109 6.97 7.42 1,798
2012E 152 1,748 4 1.0827 3
2013E 157 1,800 13 1.1722 11
2014E 165 1,890 16 1.2691 13
2015E 172 1,966 15 1.3740 11
2016E 178 2,034 15 1.4877 10
2017E 183 2,096 15 1.6107 9
2018E 188 2,158 15 1.7438 9
2019E and after 194 2,223 16
295
Note 14
60
Appendicles
11.18)
Direct valuation
Appendix 18: Valuation Abnormal Earnings Models:

2011A 2012E 155 (74) 229 2013E 158 53 105 19 176 167 9 1.0816 8 2014E 165 91 75 9 174 170 4 1.1699 3 2015E 172 76 96 6 178 179 (1) 1.2654 (1) 2016E 178 69 109 8 186 186 (0) 1.3687 (0) 2017E 183 62 122 9 192 193 (0) 1.4805 (0) 2018E 189 63 125 10 199 198 0 1.6013 0 9 155 11 6 171 12.25 2,097 2,132 7.05 7.50 2019E and after 195 65 129 10 205 204 0
Comprehensive income Change in equity Dividends(or Free cash flow to equity) Earnings on reinvested dividends (Cost of equity x FCFEt-1) Cum-dividend earnings (CI + Earnings on reinvested dividends) Normal earnings ((1+Cost of equity) x CIt-1 ) Abnormal earnings growth (Cumdividend earnings - Normal earnings) Discount rate: (1 + Cost of equity)t Present value of AEG at t=1 Terminal value (AEG/(Cost of equity Growth)) Comprehensive income at t=1 PV of AEG in forecasting period at t=1 PV of terminal value at t=1 Total earnings to be capitalised Capitalisation rate (1/Cost of equity) Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price
2011A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E and after
61
Appendicles
Indirect valuation Operating income Change in net operating assets Free cash flows Operating income on reinvested free cash flows (WACC x FCFt-1) Cum-free cash flow operating income (OI + Operating income on reinvested free cash flows) Normal operating income ((1+WACC) x OIt-1 ) Abnormal opearting income growth (Cum-free cash flow earnings - Normal earnings) Discount rate: (1 + WACC)t Present value of AOIG at t=1 Terminal value (AOIG/(WACC - Growth)) Operating income at t=1 PV of AOIG in forecasting period at t=1 PV of terminal value at t=1 Total operating income to be capitalised Capitalisation rate (1/WACC) Value of firm Plus: Value of financial assets Value of equity before time adjustment Value of equity as of valuation date Share price as of valuation date Target price 152 10 5 168 12.09 2,033 41 2,074 2,109 6.97 7.42 152 (51) 203 157 52 105 17 174 165 9 1.0827 8 165 90 75 9 174 170 4 1.1722 3 172 76 96 6 178 179 (1) 1.2691 (1) 178 69 109 8 185 186 (0) 1.3740 (0) 183 61 122 9 192 192 (0) 1.4877 (0) 188 63 125 10 198 198 0 1.6107 0 9 194 65 129 10 204 204 0
Note 14
11.19)
Appendix 19: Multiples valuation
62
Appendicles
Source: bloomberg.com Date: 15 March 2012 PE Trailing twelve moths 18.84 29.31 4.07 14.47 15.14 29.15 Forward PE 15.01 15.98 3.24 14.30 22.46 19.79 EPS trailing twelve months 0.3617 0.018 0.3617 0.953 0.552 0.1751 Forward EPS LTMD 0.454 -23.61 0.033 0.454 0.964 0.372 0.258 -46.26 -6.89 -21.20 -26.12 Cost of ROE equity 6.08% 8.16% 3.06% 0.25% 13.26% 4.76% 3.23% 15.7% 14.2% 6.25% 7.93% 8.24% Norm Nor al mal trailin fwd g PE PE 13.25 12.25 7.36 6.36 8.05 7.05 17.01 16.01 13.62 12.62 13.13 12.13
PERSIMMON PLC Taylor Wimpley plc Barrat Developments plc Berkeley Group Holding plc Bellway plc Bovis Home Group
Price 6.82 0.53 1.47 13.79 8.36 5.11
BPS 6.09 0.57 3.02 7.69 8.88 5.45
PB 1.12 0.92 0.49 1.79 0.94 0.94
Beta 1.10 2.52 2.23 0.73 1.05 1.11
LTMD = Median analysts' long term growth estimate. A composite estimate of the anticipated annual growth rate in EPS over a five year period. Valuation of Persimmon plc Largest housebuilding companies as the benchmark Mean P/B ratio 1.02 Estimated share price 6.19 Median P/B ratio 0.94 Estimated share price 5.70 Mean trailing P/E ratio 18.43 Estimated share price 6.67 Median trailing P/E ratio 15.14 Estimated share price 5.47 Mean forward P/E ratio 15.16 Estimated share price 6.88 Median forward P/E ratio 15.98 Estimated share price 7.26
63
Appendicles
12)
Note:
1. In our report, we based our analysis on annual financial reports rather than restate figures. From 2009, there were changes in the accounting policies of Persimmon plc. However, in order to analyse the financial performance of company on an annual basis, we relied on actual performance at the end of each financial year. 2. Intangible assets consist mainly from goodwill with a small proportion of brand and know-how. Hence, intangible assets are considered to be operating assets 3. Investment was accounted for using the equity method and was considered an operating asset, because this is the long-term equity investment in associated and jointly-controlled companies. 4. Available for sale financial assets comprises loans provided as part of sales transactions. Hence, this item is classified as operating assets because it relates to sales activities of Persimmon. 5. Based on argument of note 1, inventories in 2006 and 2007 are different from the restate figures of 2006 and 2007 in annual report of fiscal year in 2009. 6. Other operating incomes are related to the sale of land holdings, freehold reversions, rent receivable and other incidental sundry income. It could be considered as unusual operating income. However, this amount is recurred every year. Moreover, other incidental sundry income is just a small part of item. Hence, we consider other operating income as the core operating from sales of company. 7. Operating expenses item has included intangible assets. However, intangible assets item is exceptional item; hence, we split the amount of intangible assets in operating income and put in to unusual income part. 8. According to note 9, financial report of 2007, we have restructuring cost of 2006.
64
Appendicles
9. Intangible asset impairment is the amount that has been split from operating expense plus the exceptional items in annual reports. 10. In 2011 final results, we do not have enough information about unusual financial expense. However, based on 2010 annual report, the amount of increasing in interest expense on bank overdraft and loans item accounted a large proportion. Moreover, based on Persimmon strategy, in 2011, company has paid out a huge amount of debt. Hence, we assume and consider financial expense of Persimmon in 2011 entirely focusing on increasing in interest expense on bank overdraft and loans item 11. This effective tax rate, we take from annual report every year. However, in 2011, final result of Persimmon has not been revealed this rate. Hence, we do not add this information in for the year 2011. 12. For common size horizontal analysis, there are some items arising after the based year 2006. Hence, we take the first year happening as the base year instead of 2006. 13. 10 years UK Government Bonds (maturity on 15 March 2022, coupon payment rate 4%source: Financial Times) 14. Value of equity is related to all activities that generate assets for firm: Value of equity = value of firm + Net financial assets Hence, when we calculate value of share based on indirect method, the value of net financial assets have been deducted to the value of equity for WACC calculation
65
Appendicles
13)
References
14
PricewaterhouseCoopers, UK Economic Outlook: July 2011 Available from: http://www.pwc.com/im/en/assets/document/UK_ Economic_Outlook_July_2011.pdf

15
Department for Communities and Local Government
(2011), Laying the Foundations: A Housing Strategy for England Executive Summary Page 8
2
HM Treasury, Forecast for the UK economy: a comparison
Hilary Osbourne, (2012), House Prices in 2012, The Nationwide Building Society (2011) House Price Data The Construction Index (2011), Top 20 House Builders Communities and Local Government (2011), Regulated RuralZed (2011), The Zero Carbon House is Ready Cornwall Council v Persimmon Ltd (2011), Taunton Persimmon Homes (2011), Annual Report 2011 dated 2012 March 1th HM Treasury, Forecast for the UK economy: a comparison of
of independent forecast Available from: http://www.hmtreasury.gov.uk/d/201202forcomp.pdf

16
Guardian
3 4
Knight Frank, Residential Research: UK housing market
2011
5
forecast Available from: http://my.knightfrank.com/researchreports/uk-housing-market-forecast.aspx

17
Mortgage Survey 2011

6 7
Bloomberg, Persimmon sees Full-Year pretax profit at Top
Ten of Analysts Estimates Available from: http://www.bloomberg.com/news/2012-0109/persimmon-sees-full-year-pretax-profit-at-top-endof-analysts-estimates.html

18
Deane Council v Persimmon Ltd (2011)

8 9DataStream 10
independent forecast Available from: http://www.hmtreasury.gov.uk/d/201202forcomp.pdf PricewaterhouseCoopers, UK Economic Outlook: July 2011
RICS Research (2011), The future of UK House building
Available from: http://www.rics.org/site/download_feed.aspx?fileID= 8638&fileExtension=PDF Bhojraj S. & Lee C.M.C, 2001, Who is My Peer? A
11
19
Available from: http://www.pwc.com/im/en/assets/document/UK_Eco nomic_Outlook_July_2011.pdf Bank of England, (2012) CPI Data February 2012 BBC, UK population to increase to 70 million by 2027
Valuation-Based Approach to the Selection of Comparable Firms, Journal of Accounting Research, Vol. 40, No. 2, USA
20
Fernandez P. & Campo J., Market risk premium used in
2010 by analysts and companies: a survey with 2,400 answers

12 13
Available from: http://www.iese.edu/research/pdfs/DI-0912-E.pdf
Available from: http://www.bbc.co.uk/news/uk15461579
66
Appendicles

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Company Valuation and Performance

23rd March 2012

GROUP 6 CANDIDATE NUMBERS 13558, 47730, 47461, 49797

NOTE: .............................................................................................................................. 64 REFERENCES..................................................................................................................... 66

Persimmon Analysis & Valuation

Valuation & Recommendation

Persimmon Analysis & Valuation

Figure 1: Volume of Property Sales in England and Wales

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

Persimmon Analysis & Valuation

Persimmon Analysis & Valuation

3.2) Affordable Housing: Robust for Industry Volumes

Persimmon Analysis & Valuation

3.3) Trends in the New Build Industry

Persimmon Analysis & Valuation

3.4) House Building Industry Structure and Analysis

Persimmon Analysis & Valuation

Image: Notting Hill Housing Association

Persimmon Analysis & Valuation

4.1) Strategy Analysis

Persimmon Analysis & Valuation

4.2) Competitive Positioning

Circle radius proportional to 2011 revenue (m)

Persimmon Persimmon '07

Taylor Wimpey Taylor Wimpey '07

4.3) Social Housing Mix

10% 0% -10% -20% -30% -40% -50% -60% -70%

Revenue (m) Average Price ()

Figure 7: 2011 mix of affordable homes

Figure 8: performance 2007 2011

Persimmon Analysis & Valuation

Persimmon Analysis & Valuation

6.1) Intangible Assets

Persimmon Analysis & Valuation

6.3) Revenue recognition

Persimmon Analysis & Valuation

6.4) Forward Currency Swaps

Persimmon Analysis & Valuation

2007 2008 2009 2010 2011

Figure 10 Persimmons income from 2007 to 2011

Persimmon Analysis & Valuation

0.4 0.2 0 ROE

Persimmon Analysis & Valuation

Persimmon Analysis & Valuation

14.8% 0.80 11.9% 1.85 22.0%

-38.8% 0.42 -16.4% 1.77 -29.0%

4.5% 0.45 2.0% 2.03 4.1%

8.0% 0.56 4.5% 1.72 7.8%

7.4% 0.56 4.2% 1.56 6.5%

16.5% 1.12 18.4% 7.6% 10.8% 0.33 3.5% 22.0%

-36.1% 0.57 -20.7% 6.5% -27.1% 0.31 -8.4% -29.0%

8.1% 0.86 6.9% 21.8% -14.8% 0.03 -0.4% 6.5%

Figure 14 Return on equity Persimmon VS Taylor Wimpey

Persimmon Analysis & Valuation

7.3) Working Capital Management

542 24 135 432

624 35 168 492

616 14 152 477

550 12 155 407

557 13 160 410

Persimmon Taylor Wimpey

Persimmon Tarlor Wimpey

Figure 17 Account receivable days Persimmon vs Taylor Wimpey

Persimmon Analysis & Valuation

Group 6 - Persimmon Analysis & Valuation

Group 6 - Persimmon Analysis & Valuation