MJ Gleeson (GLE) chief executive Jolyon Harrison believes that the company he helped to lift out of the doldrums has now achieved the ideal blend of selling expensive land to housebuilders in the south of England and building low-cost homes on brownfield sites in the north of the country, where there is major growth potential.
- First-half home sales up 56 per cent
- Land bank worth potential 21,600 plots
- Net cash
- Strong forward order book
- Modest dividend
- Strategic land sales erratic
The housebuilding operation focuses on buying brownfield sites in socially deprived areas in the middle of inner cities. Typically, it buys a derelict piece of land in the middle of a council estate that the local council is keen to redevelop but can't find a buyer for. Gleeson then builds conventional family homes and encourages the local residents to buy. Land plots can work out at as little as £10,000, which is impressive given that selling prices average £118,000. Costs are kept down by having small and similarly structured management teams in each operating region, while good-quality, but inexpensive, building products are used throughout.
Sales in the first half of the year to the end of December jumped by 56 per cent to 258 homes, and received a considerable boost from the government's Help to Buy scheme, which accounted for 44 per cent of sales. Active sites rose from 27 a year earlier to 33, and further sites are currently under negotiation that could lead to an additional 1,940 plots, taking the land pipeline to in excess of 6,000 plots. The company has ambitions to grow its housebuilding operation to a 1,000-homes-a-year business. That would double its size, based on broker N+1 Singer's 2014 forecasts, and underpins its predictions of rapid EPS growth. Given three forecast upgrades issued by N+1 in 2013, the forecasts used in our table could well understate the growth potential.
| MJ GLEESON (GLE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 395p | MARKET VALUE: | £210m | |
| TOUCH: | 389-395p | 12-MONTH HIGH: | 397p | LOW: 170p |
| FORWARD DIVIDEND YIELD: | 1% | FORWARD PE RATIO: | 18 | |
| NET ASSET VALUE: | 212p | NET CASH: | £9.9m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 41.3 | -1.89 | -3.59 | nil |
| 2012 | 40.8 | 0.10 | 0.10 | nil** |
| 2013 | 60.7 | 4.80 | 9.00 | 2.50 |
| 2014* | 74.1 | 9.20 | 17.3 | 3.20 |
| 2015* | 85.9 | 11.9 | 22.3 | 4.00 |
| % change | +16 | +29 | +29 | +25 |
Normal market size: 1,000 Matched bargain trading Beta: 0.32 *N+1Singer estimates, underlying PTP and EPS numbers **Excludes special dividend of 5p | ||||
On the strategic land side, Gleeson buys greenfield sites in the south of England and then secures planning consent before selling them on to housebuilders. Land sales can be erratic. For example, in the last full year to June 2013, they were down from 115 acres to 42.5 acres, and delivered 439 plots. However, there's clearly value in the strategic land bank, which comprises 70 land interests of 3,781 acres, enough to build 21,600 homes.
On valuation terms, net assets per share of 212p values the land bank at cost and not development value. That means the price-to-book ratio of 1.9 times, which is among the highest in the sector, is arguably not as stretched as it first appears. What's more, the stock commands a modest forward 2014 price-to-earnings growth ratio of 0.8. In addition, Gleeson has net cash and recently agreed a new three-year £20m revolving credit facility to finance further expansion.
