MJ Gleeson stands out from the crowd

MJ Gleeson (GLE) is unlike other housebuilders. In part, this is because it targets a lower price point than its competitors, with its average home selling for £167,300, but it is also because post-Grenfell cladding costs have not impacted its bottom line in the same way they have for its competitors.

MJ Gleeson posted a 2 per cent increase in pre-tax profits for the year to 30 June, which would have been a 33 per cent increase were it not for £12.9mn in fire safety costs as a result of its pledge to the government to deal with all fire safety issues on buildings over 10 metres high dating back 30 years. Many housebuilders were lumped with those costs this year, but few have still been able to report an increase in profit despite it.

The company says it did not have “any exposure at all” to the issue until the government changed the length of time that housebuilders were responsible for from 15 to 30 years. Should the government expand the scope of responsibility any further – something Parliament is looking into – MJ Gleeson might be liable to pay more. However, shareholders can take solace in the fact that the company’s costs so far are small change compared with the vast sums its competitors have had to stump up.

Where shareholders might be a bit more nervous is the looming housing downturn. Sales have stalled thanks to a rise in interest rates, while prices are predicted to fall next year, which would impact both demand and profit margin. Meanwhile, inflation is hitting the cost of construction on the supply side, which is squeezing margins for many housebuilders further.

Stefan Allanson, chief financial officer, says that the rise in house prices so far “more than covers the cost of inflation” when it comes to construction. He’s confident the margins will not be hit too hard by a downturn. As for the sales side, he argues that the “truly affordable” end of the housing market for which the company caters will not be as affected by a housing downturn because there is more demand in that price range than in the market as a whole.

While the yawning social housing deficit does support Allanson’s point, a recession combined with the end of the Help to Buy scheme next year could put even MJ Gleeson’s “truly affordable” homes out of reach for many. A drop in demand for its price point, then, seems almost a certainty. Hold.

Last IC view: Hold, 735p, 10 Feb 2022