Are Persimmon shares a good investment?

Persimmon shares haven’t been a strong performer in 2023, but with the housing market cycle seemingly near bottom, is now the time to buy?

Khaki Plc (LSE:PSN) shares are down more than 15% so far this year and 31% in the last year. And by extending the timeline to five years, the stock has plummeted more than 56%. Needless to say, it has been a difficult time to be a Persimmon shareholder. But now that stocks are trading significantly lower, are investors overdue for a recovery?

It currently has a P/E ratio of about 10. Does this offer a good bargain for investors? Or is the low rating justified? First, let’s look at the company’s fundamentals/prospects and see if buying Persimmons stock will be a good investment.

Key points

• In the first half, 4,249 homes were completed out of the company’s expectation of completing at least 9,000 homes in 2023.
• As of August 6, the company has an increased undrawn credit facility of £700 million.
• Planning has been granted for a new Space4 factory with the capacity to deliver an additional 7,000 homes.

What does Persimmon Plc do?

Persimmon Plc is a leading UK housebuilder founded in 1972 with headquarters in York. The company offers home construction services. This includes residential building design, construction and maintenance services. It also offers concrete bricks and tiles.

The company is committed to expanding homeownership opportunities to thousands of families and first-time buyers. This is achieved by selling homes at an attractive and affordable asking price, around 25% below the UK national average for new build homes.

What do the finances look like?

The company’s financial performance during the first half of the year was not a surprise, considering the challenging market environment, cost inflation and other setbacks. Net flow generated by the operation fell 66% to £155.3 million. Gross profit also fell by 54% to £234m.

As of August 6, the company has an increased undrawn credit facility of £700 million. Furthermore, in accordance with the policy of its board of directors, an interim dividend of 20 pence was declared for the first half of 2023.

The Bullish Case for Persimmon Share Price

Despite the challenges of the first half of 2023, the company will meet expectations for the second half and be on track for excellent future growth.

Persimmon has strong support from its banking partners. In July 2023, a consortium of five banks signed a new £700m sustainability-linked loan with a five-year team. This facility provides the company with sufficient resources to expand its ground coverage and networks.

Additionally, the company is focused on achieving net-zero housing 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. This certainly puts the company on track to achieve its goal of 9,000 homes by the end of the year. And planning has been granted for a new Space4 factory with the capacity to deliver an additional 7,000 homes.

Interestingly, there have been exceptional land deals that maintain a rate of return combined with the conversion of existing land properties supporting outlet growth. That said, the company appears to be on track to exceed its 2023 expectations with a sales incentive of around 3%.

In light of the above, I consider Persimmon stock to be a strong bull case. Despite this, I still have some reservations.

The Bearish Case for Persimmon Share Price

With several factors such as inflation from high construction costs, marketing costs and fluctuating prices, among others, Persimmon’s share price is riddled with uncertainties. I am also concerned about the continued decline in home prices. This means Persimmon Plc’s profits could shrink.

Apart from the above, private completion for first-time buyers decreased by 8%. Additionally, the company is exposed to challenging planning environments, such as 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 being seen in the company’s fundamentals. And the company’s progress is still subject to these factors.

This year there have been two planning rejections. In addition, the opening of some 250 establishments in the next two and a half years is subject to planning and market conditions. Unfortunately, the success rate of these projects is unpredictable. And when planning is rejected or there are very unfavorable market conditions, the company runs the risk of suffering losses.

Persimmon Stock Price Prediction

Over the last 52 weeks, the stock has hovered around a low of 953p and a high of 1,531p. As I write, Persimmon shares are trading around 1,110p. Compared to the most pessimistic analysts’ forecasts of 980p, that suggests housebuilder shares still have room to fall. However, there are more bullish expectations if house prices manage to stabilize, with predictions for Persimmon’s share price reaching 1,500p in the next 12 months.

However, each forecast is based on a set of assumptions that may not come true. As such, there are never guarantees.

Should you buy Persimmon shares today?

The housebuilder founded in 1972 still appears to have a strong presence in its sector. Obviously, this is a positive sign for me.

The company’s fundamentals appear solid and capable of sustaining the group’s generous dividend policy. This potentially opens the door to lucrative passive income even if the stock price continues to fluctuate.

The potential of this business remains ultimately linked to the fate of the British property market. And while conditions are not ideal right now, I think the long-term outlook remains intact. That’s why I’m considering adding this company to my portfolio today.

Article sources

1. london stock exchange, Presentation of Persimmon Plc’s half-year results dated August 10, 2023
2. The Guardian, UK house prices fall at fastest rate since 2009 following interest rate rise

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. The opinions expressed about the companies and assets mentioned in this article are those of the author and therefore may differ from the opinions of The Money Cog Premium Services analysts.