Uncertainty ahead of the UK general election may be damaging sentiment towards shares in the housebuilding sector, but the underlying fundamentals look pretty encouraging, meaning this could provide a good entry point. The sector is benefiting from a massive supply/demand imbalance, an extension of the Help to Buy scheme, cheap mortgages, and a recent stamp duty change that means people buying at the cheaper end of the market won't pay the tax any more.
- Profits more than doubled in the year to June
- Target to double housing completions
- Net cash balance
- 21,000 plots of strategic land
- Modest dividend payout
- Lumpy land sales revenue
MJ Gleeson (GLE) looks particularly well-placed, especially having now fully recovered from a root and branch restructuring a few years back. The company, which has two trading arms, has a housebuilding business that should find the tax changes particularly helpful.
This division concentrates on buying up derelict land in the north of England and builds houses at the affordable end of the market. Last year, average selling prices were £121,000, less than half the national average for a new home and prices are likely to stay low, with volume driving profits higher. Indeed, completions in the year to last June jumped 38 per cent from a year earlier to 561 units, and Gleeson has a mid-term target of nearly doubling this to 1,000 units with growth of around 25 per cent expected this year.
What's more, it has the land to build on, with over 5,000 plots either owned or conditionally purchased, with a further 1,700 under consideration. And lower than average selling prices do not mean lower margins because the land is relatively cheap to buy and working closely with local authorities to rejuvenate derelict inner-city land makes the planning process less fraught. The company is also very disciplined on the prices it will pay for land and operating costs. So, even without the heady price inflation seen in the south, Gleeson has more than doubled operating margins since 2012 to nearly 15 per cent, and the return on capital employed has risen from 3.6 per cent to 13.7 per cent.
| MJ GLEESON (GLE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 363p | MARKET VALUE: | £195m | |
| TOUCH: | 355-365p | 12-MONTH HIGH: | 467p | LOW: 325p |
| FORWARD DIVIDEND YIELD: | 2.5% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 239p | NET CASH: | £11.8m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 41 | 0.1 | 0.1 | nil** |
| 2013 | 61 | 4.8 | 9.1 | 2.5 |
| 2014 | 81 | 11.4 | 15.8 | 6 |
| 2015* | 99 | 16.6 | 24.4 | 7.6 |
| 2016* | 112 | 20.0 | 29.6 | 9.2 |
| % change | +13 | +20 | +21 | +21 |
Normal market size: 1,500 Matched bargain trading Beta: 0.45 *N+1 Singer estimates, adjusted PTP and EPS figures **Excludes 5p special dividend | ||||
Gleeson's other business, Gleeson Strategic Land, buys land in the prosperous parts of the south of England and brings it through planning to sell as 'oven-ready' plots for hungry housebuilders. This is the smaller of the two operating divisions, and revenue tends to be lumpier because the process of bringing land through the planning process is an inexact science at best.
However, there is significant unrealised potential in the portfolio that currently consists of 66 sites in the south of England, totalling over 3,900 acres and with the potential to deliver around 21,100 units. In the year to last June, the company made seven land sales with the potential to deliver 617 plots. This year looks like it could be better as there are eight sites with planning consent, six of which consist of 643 plots and will be put up for sale in the current financial year. And there are a further 13 sites awaiting consent, and some of these could be sold before June.
Company finances are in pretty good shape. Operating cash flows in the last full year were £12.1m, up from £4.2m a year earlier, while there was a year-end cash balance of nearly £14m. On top of this, there is a three-year £20m revolving facility with Lloyds Bank, providing additional flexibility and capacity for growth.
