Persimmon Plc (LSE:PSN) shares are down over 15% year to date and 31% in the past year. And when stretching the timeline to five years, the stock has plunged over 56%. Needless to say, it’s been a tough time to be a Persimmon shareholder. But with the stock now trading significantly lower, are investors overdue for a comeback?
Presently, it has a P/E ratio of roughly 10. Does this offer a good bargain for investors? Or is the low valuation justified? First, let’s look at the company’s fundamentals/prospects and see whether buying Persimmons shares will be a good investment.
- In the first half, 4,249 homes were completed out of the company’s expectation to complete at least 9,000 homes in 2023.
- As of 6 August, the company has an increased undrawn facility of £700m.
- Planning has been granted for a new Space4 factory with the capacity to deliver 7,000 additional homes.
What does Persimmon Plc do?
Persimmon Plc is a leading UK house builder founded in 1972 with headquarters in York. The company provides home-building services. This includes design, construction and maintenance services for residential buildings. It also offers concrete bricks and roof tile.
The company is committed to widening the opportunity for home ownership to thousands of families and first-time buyers. This is achieved by selling homes at an attractive and affordable selling price, around 25% below the UK national average for newly built homes.
How do the financials look?
The company’s financial performance for the first half of the year was not a surprise, considering the challenging market environment, cost inflation, and other setbacks. Net flow generated from operation dropped by 66% to £155.3m. The gross profit also decreased by 54% to £234m.
As of 6 August, the company has an increased undrawn facility of £700m. More so, in line with their Board policy, the interim dividend of 20p has been declared for the first half of 2023.
The bull case for the Persimmon share price
Despite the challenges of the first half of 2023, the company is set to deliver expectations for the second half and set for excellent future growth.
Persimmon has strong support from its banking partners. In July 2023, a new sustainability-linked facility of £700m with a 5-year team out was signed through a consortium of five banks. This facility provides the company with sufficient resources to expand its land coverage and networks.
In addition, the company is focused on achieving net zero homes in use by 2030. In my opinion, this is achievable as the company has demonstrated resilience and cost discipline in its performance.
In the first half of 2023, 4,249 homes were completed. That certainly places the firm on the right track to achieving its 9,000 home end-year target. And planning has been granted for a new Space4 factory with the capacity to deliver 7,000 additional homes.
Interestingly, there have been exceptional land deals that maintain a hurdle rate combined with the conversion of existing land holdings supporting growth in outlets. That being said, the company appears to be on track to exceed its expectations for the year 2023 with a sales incentive of around 3%.
In light of the above, I consider a strong bull case the Persimmon shares. That notwithstanding, I still have some reservations.
The bear case for the Persimmon share price
With various factors like high build cost inflation, marketing costs, and fluctuating prices, among others, the share price of Persimmon is plagued with uncertainties. Equally of concern to me is the steady drop in home prices. This means profit could be set to shrink for Persimmon Plc.
Apart from the above, private completion to first-time buyers is down by 8%. Moreover, the company is exposed to challenging planning backdrops like local plan withdrawal, persistent nutrient neutrality and other planning biases.
Although Persimmon had been quite proactive in its response to these challenges and uncertainties, their effects are still seen in the company’s fundamentals. And the progress of the company is still subject to these factors.
There have been two planning refusals this year. Also, the pipeline of about 250 outlets opening in the next two and half years is subject to planning and market conditions. Sadly, the success rate of these projects is unpredictable. And where planning is refused, or there are severe unfavourable market conditions, the company is at risk of losses.
Persimmon share price prediction
In the past 52 weeks, the stock has hovered around a low of 953p and a high of 1,531p. As I write, Persimmon shares are trading close to 1,110p. Compared to the more pessimistic analyst forecasts of 980p, that suggests the home builder stock still has room to tumble. However, there are more bullish expectations if house prices can stabilise, with Persimmon share price predictions standing as high as 1,500p within the next 12 months.
Nevertheless, every forecast is built on top of a set of assumptions that may not come to pass. As such, there are never any guarantees.
Should I buy Persimmon shares today?
The home builder founded in 1972 still appears to have a solid foothold in its industry. This is obviously a positive sign for me.
The fundamentals of the company appear to be sound and look capable of sustaining the group’s generous dividend policy. That potentially opens the door to lucrative passive income even if the share price continues to fluctuate.
The potential of this business remains ultimately tied to the fate of the British housing market. And while conditions are hardly ideal right now, I think the long-term picture remains intact. That’s why I’m considering adding this enterprise to my portfolio today.
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- London Stock Exchange, Persimmon Plc Half Year Result Presentation dated 10 August 2023
- The Guardian, UK house prices fall at fastest rate since 2009 after interest rate rises
Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.