MJ Gleeson full of growth potential

We've made MJ Gleeson our 2016 Growth Tip of the Year due to highly favourable economic and political conditions in its end market, and the potential to boost growth further with a strategic move into new regions. These factors should help extend the company's excellent track record of beating analysts' earnings forecasts (see chart). 

The group operates two businesses: selling affordable houses in the north of England and pulling land through the planning process and selling it to hungry housebuilders in the south. Given the recent raft of government initiatives to make houses more easily affordable, Gleeson is already ahead of the game. With average selling prices in the year to June 2015 of £123,750, Gleeson's houses really live up to the 'affordable' billing. And concentrating on this type of home has also kept Gleeson out of the buy-to-let market, which is expected to be negatively affected by recent government policy changes.

Gleeson's houses may not cost the earth, but they are nevertheless good quality. Some of the areas being redeveloped will have social issues, but putting residents in charge of their own homes brings rapid positive changes. And because many of the brownfield sites that it regenerates are not in demand for any other use, prices are low. Land acquisition costs have remained steady for the past three years at just £8,500 per plot. Cost inflation has also been kept to a minimum with a rapid payment scheme, whereby subcontractors are paid in relation to the quality of their services and workmanship. For example, grade A subcontractors are paid within 14 days of invoices, while grade D subcontractors are invited in for a chat.

A combination of cheap land prices and acceptable build costs means that gross profit per plot last year was up 5.5 per cent at £36,700. Home sales in the year to June rose by a third to 751, with a medium-term target of 1,000 a year. Meanwhile, sales outlets grew from 33 to 39, a number that is expected to reach 50 by June 2016. To meet this expansion Gleeson has been steadily growing its land bank, which now stands at 7,717 plots. It is now considering extending its business model outside its existing patch. No firm decisions have been taken, but a staged expansion into adjacent regions could treble Gleeson's addressable market, according to analysts at N+1 Singer.

Gleeson's housebuilding activities in the north of England are supplemented by its land management business in the south. Turnover from strategic land sales doubled in the year to June, and the division has performed well ahead of expectations since then, selling two sites with planning consent for 405 residential homes and a further site of 112,700 sq metres for commercial use. Currently, the development land pipeline comprises 68 sites totalling 3,905 acres, with the potential to deliver around 21,250 homes. Of these, eight have planning consent, and six are being processed for sale in the current financial year. Prospects for further sales look promising, although, by the very nature of the planning process, sales revenue can be a little lumpy.