MJ Gleeson's earnings slashed, but future looks bright

Sometimes, it pays to be honest. MJ Gleeson (GLE) had already revealed most of the bad news in the housebuilder's half-year results in a trading update last month. Shares sank 10 per cent on that day. Meanwhile, on results day, the stock hardly moved. "The interim results are in line, with no surprises," said Investec analyst Aynsley Lammin.

The main headline was gross margins falling "below expectations by circa 1.5 per cent to 2.0 per cent" due to lower demand reducing selling prices and "additional costs relating to several older sites". Chief executive Graham Prothero told Investors' Chronicle the older sites were a legacy issue, citing "poor workmanship" on infrastructure on developments built before his tenure.

Meanwhile, as has been the case for all housebuilders, revenue and earnings per share (EPS) slumped by over half due to high interest rates reducing buyers' budgets. In response, it cut the dividend, but only by 20 per cent, meaning it is less covered than last year. The company said its policy of full-year EPS covering the full-year dividend by "three to five times" remains in place. As such, analyst Singer predicts the full-year dividend will drop to 10p from 14p.

However, we remain bullish on MJ Gleeson, bearing in mind that its rivals face the same issues. Meanwhile, forward sales have swelled to 586 plots from 319 last year, while many housebuilders' forward sales have dropped. This points to MJ Gleeson's much more affordable price point. Its peers talk a lot about recovery, but we back MJ Gleeson to 'walk the walk' and return to growth much faster. The shares trade at net asset value and the price-to-earnings ratio is higher than some rivals, but quality comes at a price. Buy.