FTSE 250 housebuilder Persimmon (LSE: PSN) looks to me like it might be in the right place at the right time for a sustained rebound.
Relegation from the FTSE 100
It was demoted from the FTSE 100 last August following H1 2023’s 65% drop in underlying operating profits from H1 2022 — to £152.2m. The period also saw a 36% fall in its new home completions to 4,249.
However, at that point, interest rates had risen to 5.25% from a record low of 0.1% in December 2021. Mortgage rates had followed suit, increasing to a 16-year high. And the Help to Buy housing purchasing scheme had ended on 31 March.
Now though, interest rates are expected to fall further, taking mortgage rates with them.
Housing market prospects now
That said, according to the independent think tank Centre for Cities, the UK has a 4.3m housing deficit compared to the European average.
The new government has pledged to build 300,000 new properties each year for the next five years. Therefore, even with no further increase in demand, the housing deficit wouldn’t be cleared for over 14 years.
Consequently, the prospects for a leading UK housebuilder look very good to me.
A key risk for the firm is that this planned building programme stalls. Another is a reversal in the recent trend of lower inflation and interest rates. This could cause another spike in the cost of living and put a brake on the housing market.
How does the core business look currently?
Persimmon’s underlying H1 2024 operating profit was only slightly above H1 2023’s, at £152.3m. However, new home completions increased 4.6% to 4,445, and total revenue rose 11% — to £1.32bn.
Given the figures, the firm’s confident it can deliver around 10,500 homes this year. Its current private housing forward order book’s up 28% on the same period last year, at £1.12bn. And the average selling price of these is 2% higher.
Consensus analysts’ estimates are that the company’s earnings will grow 17% a year to the end of 2026. Earnings per share are expected to increase 16.7% a year to that point. And return on equity is forecast to be 12.1% by then.
Shareholder rewards
Rising earnings drive increases in a firm’s share price and dividends over time. In 2023, Persimmon paid a total dividend of 60p a share. This gives a yield of 3.5% on the current share price of £17.01 – ahead of the FTSE 250’s 3.3% average.
Analysts project that the yield will increase to 4% in 2025 and to 4.4% in 2026. Although the stock’s price has risen since its H1 2024 results, it still looks cheap to me.
A discounted cash flow analysis using other analysts’ figures and my own shows it’s 43% undervalued. So a fair price for the shares would be £29.84, although it may go down as well as up.
Will I buy the shares?
I want to see consistent evidence of the government forging ahead with its homebuilding plans before buying the stock. As it stands, it’s on my watchlist of high-potential shares.
