Persimmon PLC (LSE:PSN) shares bounced back on Thursday as JP Morgan argued that while the housebuilder is trading at a premium on traditional metrics, it looks the "most attractive" in the sector if using an alternative measure.
Based on an enterprise value/EBIT analysis, assessing the group's market value plus debt relative to underlying profitability, the FTSE 100 group is seen by the bank as the most attractively valued UK housebuilder.
The JPM analyst Zaim Beekawa said he increasingly views EV/EBIT as a more effective spot metric for housebuilders than traditional valuation tools such as price/net asset value or price/earnings, and said this is increasingly being utilized by sector investors.
This is particularly given sector earnings per share are on average aroubd 60% below peak levels, as well as given the effects of building safety provisions and land creditors.
"Furthermore, we find an EV/EBIT valuation analysis to be more useful for a spot comparison across the sector than for comparing to long-run averages, given the distorting effect of fire safety provisions (impacting the housebuilders from 2022) and changes in the debt profile of the housebuilders within our coverage, with balance sheets more robust than historically," he wrote in the note.
While acknowledging that valuation concerns are a common investor pushback on Persimmon, the analyst said his analysis is "most supportive" of Persimmon, which is the top pick out of his 'overweight' recommendations in the sector, and "one of the cheapest housebuilders within our coverage".
Moreover, this discount exists versus the five other largest UK housebuilders in his coverage exists despite Persimmon boasting one of the lowest ratios of building safety provisions to market cap, margins higher than the 'Big 5' average and earnings growth expectations higher than the average.