Will Persimmon Benefit From Government Plans? PSN Shares A Big Gainer Over Last 12 Months

In the UK's construction sector, Persimmon, a notable FTSE 250 listed housebuilder, is navigating through challenging times accentuated by a significant drop in underlying operating profits of 65% in the first half of 2023 and a 36% fall in new home completions. This downturn came amidst a backdrop of rising interest rates and the end of the ‘Help to Buy' scheme.

Persimmon's share price (LON: PSN) has shown marked resilience, in gaining 22.6% through 2024 so far, bringing 12 months gains to an impressive 62%. As PSN closes in on 52 week highs, the stock seems to have broken out of the downward channel it had been trading in since late 2021, begging the question as to whether a more upward move can be expected?

The expected shift in interest rates downwards may improve demand. Persimmon may also find a silver lining in the government's new housing initiative which aims to confront the staggering housing deficit of 4.3 million homes in the UK. The ambitious plan seeks to build 300,000 new properties annually over the next five years, which could usher in a housebuilding boom that would benefit major construction players like Persimmon.

Persimmon has shown signs of recovery in the first half of 2024 with new home completions up by 4.6% to 4,445, while total revenue climbed by 11% to £1.32 billion. The company's confident stance on delivering around 10,500 homes in the current year coupled with a private housing forward order book increase of 28% to £1.12 billion bolsters optimism for its future prospects.

Analysts project positive momentum for Persimmon, with earnings growth estimates averaging 17% annually through 2026, and earnings per share anticipated to rise by 16.7% annually during the same period. Additionally, the expected return on equity is forecasted to reach 12.1% by 2026.

Amidst these forecasts, Persimmon offered a total dividend of 60p a share in 2023, equating to a yield of 3.5%. Expectations hold that this will climb to 4% in 2025 and 4.4% in 2026, potentially attractive for income-focused investors. Furthermore, the stock is currently seen as 43% undervalued according to a discounted cash flow analysis, with a fair price emerging at £29.84 per share.

As promising as these projections are, the construction industry is vulnerable to macroeconomic shifts, policy changes, and market dynamics. Potential investors are therefore advised to keep a close eye on the UK government's efficacy in implementing their homebuilding plans and consider the broader economic context before making investment decisions in companies like Persimmon.