To a large extent, the share prices of housebuilders have recently been driven by nervousness about a possible weakening of the housing market rather than fundamentals. Even so, it’s hard to ignore the strength of MJ Gleeson’s (GLE) trading position, building affordable homes in the north of England and bringing land through the planning process in the south to sell to hungry housebuilders.
Builds very affordable houses
Very strong growth rate
Large land bank
Net cash
Land sales can be lumpy
Modest dividend growth
Its houses really are affordable, which potentially makes it less vulnerable to either a downturn or changes to state house-buying incentives. With average selling prices at just £122,700 in the 12 months to the end of June, Gleeson's well-built properties are within the price range of a fully-employed couple earning the basic minimum wage.
This makes the business model different to other housebuilders in some key ways. Margins are attractive because land costs are extremely low rather than selling prices being high. Typically, Gleeson will work with the local authority to build on a derelict piece of wasteland, thus removing an eyesore and providing more housing, and it is very often the only bidder. Low costs help keep return on capital employed (ROCE) impressively high. ROCE rose from 23.2 per cent in 2016 to 25.4 per cent last year.
Nearly all its buyers are first timers who can take advantage of the Help-to-Buy scheme. And while there is currently a review on the scheme, expected changes, such as lowering eligible purchase prices to £300,000, look unlikely to affect Gleeson. Furthermore, low selling prices mean the builder does not face onerous Section 106 planning requirements that normally stipulate that a certain percentage of houses must be affordable; all of Gleeson's homes fall into this category. In the year to June 2017, completions rose from 904 units to 1,013, and there are plans to double this within the next five years. It already has the land to do so. Including conditionally purchased sites, it currently owns enough land to build more than 11,500 houses.
| MJ GLEESON (GLE) | ||||
| ORD PRICE: | 710p | MARKET VALUE: | £388m | |
| TOUCH: | 705-715p | 12M HIGH: | 747p | LOW: 527p |
| FORWARD DIVIDEND YIELD: | 3.9% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 314p | NET CASH: | £34m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 118 | 23.4 | 34.2 | 10.0 |
| 2016 | 142 | 28.2 | 42.6 | 14.5 |
| 2017 | 160 | 33.0 | 47.7 | 24.0 |
| 2018* | 178 | 36.0 | 52.6 | 25.1 |
| 2019* | 204 | 40.0 | 58.4 | 27.8 |
| % change | +14 | +11 | +11 | +11 |
| Normal market size: | 750 | |||
| Matched bargain trading | ||||
| Beta: | 0.09 | |||
| *Peel Hunt forecasts Adjusted PTP and EPS | ||||
Profits from the south of England focused land selling business can be lumpy, but the division's full-year profits have risen consistently since 2013. Demand for consented land in prime locations in the south remains as strong as ever. In the year to June it sold eight sites covering a total of 126 acres, with the potential to deliver 841 plots. Operating profit was up 17.6 per cent. As at June, there were 65 sites in the portfolio with the potential to deliver more than 21,500 plots. And risks are reduced by taking out options to buy land instead of buying it outright.
Finances are in good shape, too, and Gleeson's £34m net cash will be used to acquire further sites for development. There were 141 new sites in the pipeline in June and offices in seven northern locations plus pilot offices in Cumbria and east Yorkshire. Although better income can be had from some other housebuilders' shares, dividends are growing.
