Persimmon (LSE: PSN) is one of the largest housebuilders in the UK. The stock has generally been a rewarding long-term investment for shareholders — until last year, that is. Since the start of 2022, the Persimmon share price is down 50%.
But the UK still suffers from a chronic, long-standing undersupply of new homes. That isn’t going to change any time soon. So, does the sell-off represent a bargain buying opportunity for me? Let’s explore.
Housing market headwinds
The headwinds that UK housebuilders are facing are well documented. Inflation, rising interest and mortgage rates, and weaker consumer confidence are all negatively impacting the housing market.
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In a trading statement released last month, the company said it delivered 14,868 new homes in 2022. That was a 2% rise over 2021, and was towards the top end of its own guidance. However, it saw notably weaker customer demand in the second half of the year as concerns over the economy gathered pace. Its forward sales position reduced to £1bn from £1.6bn in 2021.
The outlook for 2023 remains gloomy — and the government ending its Help-To-Buy scheme at the end of March isn’t fortuitous.
Cheap stock on paper
All this uncertainty and risk has left the stock looking cheap today. It has a forecast price-to-earnings (P/E) ratio of around 9. In terms of 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 post-tax profits”.
Clearly, we don’t know how much these post-tax profits will add up to in light of the difficult operating environment. But this suggests the dividend is going to fall in the near term. Yet even if the dividend is cut substantially, the yield is unlikely to drop below the 3.6% FTSE 100 average.
One obvious positive is that the housebuilder has entered this period of uncertainty with a well capitalised balance sheet. It had £860m of cash and no debt, as of 31 December.
The longer-term demand outlook for new homes in the UK remains favourable. Undersupply combined with a growing population and changing lifestyles means Persimmon and other housebuilders should eventually return to decent levels of growth.
That suggests the current share price could represent a bargain if I’m willing to take the long view.
On the sidelines
I’ve never owned shares of Persimmon. But one of the things that I’ve always liked about the business is its industry-leading operating margin. It achieved this through years of investment in its own off-site manufacturing operations in bricks, timber frame walls and roof tiles.
This vertically-integrated structure cut building time, costs, and ultimately improved margins. It made the company stand out in an industry where housebuilders are often seen as much of a muchness.
However, Citi expects the firm’s operating margins to dip below 20% this year, from above 26% last year. Plus, its competitors are also increasing their own off-site manufacturing.
Overall, there’s too much uncertainty at the moment for me to invest in the shares. But I’m going to keep them on my watchlist for now. I’ll be interested in what management has to say when it updates shareholders tomorrow.
