UBS upgrades Persimmon on top line, returns potential

19th Mar 2014 09:44

Persimmon offers the 'best of both worlds' in terms of top-line growth and returns, according to UBS which has lifted its rating on the stock from 'neutral' to 'buy'.The bank estimates that volumes at Persimmon will increase by 17% in 2014 following 16% growth last year, while the company offers a best-in-class return on capital employed (ROCE) with cash returns along the way."Whilst the shares trade on a premium to the sector on a price-to-tangible net asset value basis they trade in line on a price-to-earnings basis given materially higher ROCE and return on equity versus the sector. As a result, we upgrade the stock to 'buy' from 'neutral'," said analysts Gregor Kuglitsch and Elliott Miley.Following Persimmon's full-year results last month which showed stronger-than-expected volume delivery and further expected inflation, UBS has lifted its earnings per share (EPS) forecast for 2014 by 5% to 120.4p, from 82.8p previously. 2015 EPS estimates have been lifted by 12% to 146.3p."While our forecasts are 18% ahead of consensus for 2015, we think the risk remains to the upside in light of recent house price inflation," Kuglitsch and Miley said.After the company announced that it is ramping up its capital return programme this year, the analysts said the likelihood of a further acceleration is high. They expect a "more even" dividend profile over the next five years.UBS has raised its target price for the stock from 1,400p to 1,540p."We believe the shares offer value in the light of premium returns and further earnings upside potential."The stock was 1.8% higher at 1,391.8p by 10:45.BC