MJ Gleeson's case for growth is compelling

At this point in the housing downturn, most housebuilders are saying the same thing. Higher interest rates have reduced buyers’ budgets, which means revenue, profit, dividends, selling price and forward sales have all fallen. Not MJ Gleeson (GLE). While most of that sentence rings true, its selling prices and forward sales have increased.

The housebuilder, which develops much cheaper homes than its peers, recorded a forward order book of 665 plots, compared with 618 last year, which it said was because it could not keep up with demand when the market peaked last summer. Meanwhile, its average selling price increased 11.3 per cent from £167,300 to £186,200, which it said it achieved by selling in more attractive locations and by increasing incentives.

This shifting of sales price and sales cost ultimately led to a drop in revenue, gross margin and pre-tax profit, but the fall is noticeably smaller than at its peers. Gross margin, for example, fell a mere 2 percentage points from 29 per cent to 27 per cent. 

Evidently, the demand for Gleeson’s much cheaper than average homes – the cost of which the Office for National Statistics currently puts at £288,000 – has held up. Buyers' budgets are smaller, so by building low-cost homes, Gleeson starts to look like a winner from the downturn. Notably, Vistry’s (VTY) share price surged earlier this week after it announced a strategy of selling affordable homes. This is where market demand is and where the equity market wants to invest.

These positive indicators – particularly the strong forward order book – explain why analysts predict a much faster recovery for Gleeson than its larger rivals. Redrow (RDW), which focuses on much wealthier buyers, is not slated for revenue recovery until 2025. Even then, revenue will be lower than before the downturn. Meanwhile, Investec predicts that Gleeson will return to revenue growth by 2024, and beat 2022 and 2021’s revenue figures in 2025.

Based on forward orders and its land bank, this seems doable. However, the caveat is that pre-tax profits and earnings per share are forecast to remain below 2022 levels even by 2025, which means low margins. Still, a pile it high and sell it cheap strategy is probably the best move for any housebuilder right now. It’s what the government and the public are asking for, and it also offers a route to growth when other housebuilders struggle to convince buyers to pay above-average prices. We upgrade our rating based on the macro picture for industry-beating returns. Buy.

Last IC view: Hold, 463p, 16 Feb 2023