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Khaki (LSE: PSN) is one of the UK’s largest homebuilders. In general, stocks have been a rewarding long-term investment for shareholders, until last year, that is. Since the beginning of 2022, Persimmon’s share price has dropped 50%.
But the UK still suffers from a chronic and protracted shortage of new housing. That’s not going to change any time soon. So does the sell-off represent a bargain buying opportunity for me? We are going to explore.
Housing Market Headwinds
The headwinds facing UK homebuilders are well documented. Inflation, rising interest and mortgage rates, and weaker consumer confidence are negatively affecting the housing market.
In a business statement released last month, the company said it delivered 14,868 new homes in 2022. That was a 2% increase from 2021 and close to the upper limit of its own guidance. However, it saw noticeably weaker customer demand in the second half of the year as concerns about the economy mounted. Its forward sales position has been reduced to £1bn from £1.6bn in 2021.
The outlook for 2023 remains bleak, and the fact that the government will end its aid to buy program at the end of March is no accident.
cheap paper stock
All this uncertainty and risk has made stocks look cheap today. It has an expected price-earnings (P/E) ratio of around 9. Regarding the dividend, the company has announced a new capital allocation policy, whereby ordinary dividends “will be set at a level that is well covered by after-tax profits”.
Clearly, we don’t know how much these after-tax earnings will add up in light of the difficult operating environment. But this suggests that the dividend will fall in the short term. However, even if the dividend is cut substantially, the yield is unlikely to fall below 3.6%. FTSE 100 average.
One obvious positive is that the builder has entered this period of uncertainty with a well-capitalized balance sheet. He had £860 million in cash and no debt as of December 31.
The longer-term demand outlook for new homes in the UK remains favourable. The tight supply combined with a growing population and changing lifestyles means that Persimmon and other homebuilders should eventually return to decent levels of growth.
That suggests that the current share price could be a bargain if I’m willing to take the long view.
on the sidelines
I have never owned Persimmon stock. But one of the things I’ve always liked about the company is its industry-leading operating margin. It achieved this through years of investing in its own off-site manufacturing operations in bricks, wood frame walls, and shingles.
This vertically integrated structure reduced construction time, costs, and ultimately improved margins. He made the company stand out in an industry where homebuilders are often seen as a lot.
However, citi it expects the company’s operating margins to fall below 20% this year, from 26% last year. In addition, its competitors are also increasing their own external manufacturing.
In general, there is too much uncertainty right now to invest in stocks. But I’ll keep them on my watchlist for now. I’ll be interested in what management has to say when I update shareholders tomorrow.
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