Betting the house on ten-bagger Persimmon

We expect a seasonal boost for housebuilders - it happens every year. This year, however, has been sensational. Persimmon shares have surged by over 40% since January and, despite a whiff that house prices are coming off the boil and following a far-from-complementary investigation by the BBC's Watchdog programme, investors treated some early profit taking in reaction to first-half results as a buying opportunity.

Customer sentiment remained strong, navigating pre-general election jitters, and has only improved since the Conservative's won a majority in May. New home legal completions rose 7% to 6,855 units in the first half of its financial year to 30 June, driving a 12% rise in sales to £1.34 billion. The election did slow the planning application process, but 122 new sites were opened nonetheless.

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As the economy goes from strength to strength, demand has been supported by record-low mortgage rates, rising employment, and higher disposable incomes. Put simply; more people are able to buy new builds, even though the group's average selling price rose by 4% to £195,000. The rate of sale into the private market is 12% higher than last year, with 4,606 homes selling for an average £213,000. Total forward sales were also 15% ahead, at £1.18 billion. To drive future growth, Persimmon acquired around 11,500 new plots of land in the period, taking its total to 92,400.

Before its sizeable and early special dividend payment of £291 million, cash inflow was around £191 million, with net cash at £278 million.

The results look good, but UK house prices fell 0.2% in June against forecasts of 0.5% growth, according to Nationwide. That raises fears that housebuilders have run out of steam.

Not so, says Augustin Eden at Accendo Markets: "Prices went up by 3.3% over the past 12 months. While that’s bad for normal people who want a house, it's great for the folks that build them as long as there are buyers in the market - and there clearly are. Whether house or house-builder, the phrase ‘buy on the dip’ springs to mind."

On JP Morgan estimates, Persimmon shares trade on 2.5 time price/ tangible net asset value, a premium to the sector on 1.8 times.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.