Will this FTSE 250 construction giant rise to the top in a new house building boom?
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FTSE 250 a house builder Persimmon (LSE: PSN) looks to me like it's in the right place at the right time to bounce back.
Downgrade to FTSE 100
He was demoted FTSE 100 last August following a 65% drop in H1 2023 underlying operating profit from H1 2022 — to £152.2m. This period also saw a 36% drop in new completions to 4,249.
By then, however, interest rates had risen to 5.25% from a record low of 0.1% in December 2021. Mortgage rates followed suit, rising to a 16-year high. And the Home Purchase Program ended on March 31.
Now, however, interest rates are expected to drop significantly, along with loan rates.
Prospects for the housing market now
That said, according to the independent Center for Cities, the UK has a housing shortage of 4.3m compared to the European average.
The new government has committed to building 300,000 new homes each year for the next five years. Therefore, even if there is no further increase in demand, the housing shortage will not be erased for more than 14 years.
As a result, the prospects of becoming the UK's leading housebuilder look very good to me.
The biggest risk for the firm is that this planned construction program collapses. Another reversal is the recent trend in inflation and interest rates. This could cause another spike in the cost of living and put a brake on the housing market.
What does the core business look like right now?
Persimmon's underlying operating profit for H1 2024 was only slightly higher than H1 2023, at £152.3m. However, new house completions rose by 4.6% to 4,445, and gross income rose by 11% – to £1.32bn.
Given the statistics, the company hopes to deliver nearly 10,500 homes this year. Its current order book for private homes is up 28% on the same period last year, at £1.12bn. And the average selling price of these is 2% higher.
Analyst consensus estimates are that the company's earnings will grow by 17% annually until the end of 2026. Earnings per share are expected to increase 16.7% year over year. And the return on equity is predicted to be 12.1% during that period.
Shareholder awards
An increase in earnings increases the value of a company's stock and shares over time. In 2023, Persimmon paid a net dividend of 60p per share. This gives a 3.5% yield on the current share price of £17.01 – ahead of the FTSE 250 average of 3.3%.
Analysts project that the yield will rise to 4% in 2025 and to 4.4% in 2026. Although the stock price has risen since its H1 2024 results, it still looks cheap to me.
A discounted cash flow analysis using other analysts' calculations and mine shows it is 43% less important. So the fair share price would be £29.84, although it could go down and up.
Will I buy shares?
I want to see consistent evidence that the government is moving ahead with its housing plans before buying stock. As it stands, it is on my watch list of most likely stocks.
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