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MJ Gleeson house prices jump, too

Even the prices of the cut-price developer's homes surged 11.3 per cent in the 12 months to June
MJ Gleeson house prices jump, too
  • Homes now selling for £145,800 on average
  • Rising land values could pinch margins

For a long time, a ‘pile them high, sell them cheap’ price strategy has worked very well for MJ Gleeson (GLE). During the last decade, a combination of government support, low interest rates and a steely focus on costs meant the only limit to the housebuilder’s growth was how fast it could build.

This was all done without appearing to compromise shareholder returns. Between 2014 and 2019, the group’s operating margin averaged 16.4 per cent, despite its average selling price edging up by a more modest 6 per cent.

Fast forward to 2021, and even the discount end of the market hasn’t escaped the inflationary impacts of surging Covid-era demand. In the 12 months to June, the average price of a Gleeson home jumped 11.4 per cent to £145,800. A rising tide has lifted even the cheapest boat.

But according to chief executive James Thomson, this still puts them well within the reach of a couple on the minimum wage, assuming access to the government’s Help to Buy scheme. The same cannot be said for Persimmon (PSN), the most affordable of the large housebuilders, which sold new homes for an average of £236,199 in the first six months of 2021.

Higher volumes and prices helped lift Gleeson’s gross profit margin to 28.5 per cent, although investors will be keen to know if a squeeze on profitability is just down the track. The dust is yet to settle on rising input costs, while the extra overheads that will come with net-zero home construction could render some plots non-viable if land values keep rising – even if you can acquire new plots for less than £11,000 each on average, as Gleeson does.

What’s more, as if shareholders need reminding, the Help to Buy scheme is now only available to first-time buyers and will be axed entirely from 2023.

Of course, the beauty of a structurally undersupplied market is that there are always buyers. “Our challenge is never selling homes, it’s building them fast enough to satisfy demand,” says Thomson.

The land bank is as strong as ever, and in truth there’s nothing stopping Gleeson shedding its super-affordable focus in favour of margin management. With three-quarters of land acquired from private owners, the group’s hands aren’t tied by joint ventures or the strictures of local authority delivery.

Analysts at broker Liberum expect adjusted earnings of 65.4p per share for the 12 months to June 2022, and to climb at a slower pace to 72.7p and 75.7p in the following two years. Against consensus, the shares trade in line with the five-year average, which looks fair. Hold.

Last IC View: Buy, 769p, 11 Feb 2021

MJ GLEESON (GLE)   
ORD PRICE:840pMARKET VALUE:£490m
TOUCH:802-842p12-MONTH HIGH:910pLOW: 512p
DIVIDEND YIELD:1.8%PE RATIO:14
NET ASSET VALUE:420pNET CASH:£34m
Year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201716033.049.124.0
201819737.056.032.0
201925041.261.534.5
20201475.68.7nil
202128941.758.215.0
% change+96+649+572-
Ex-div:28 Oct   
Payment:22 Nov