MJ Gleeson for that affordable look

But how can a housebuilder deliver a claimed return on equity of 29.5 per cent and a profit margin of 16 per cent, when it’s charging so little for new homes with a garden and a garage?

Let’s look at the business model. MJ Gleeson (GLE) operates in the Midlands and northern England. First, it buys land that no-one else wants – plots that are small enough to duck under the radar of the bigger operators, but too big for small builders. A site will typically be within a council estate and will be derelict. Such sites often attract unsocial activity and petty crime, so local authorities are keen to see them put to a better use. Building new houses immediately cuts nasty behaviour, helps to lift the area and provides the local authority will a helping hand towards its affordable housing obligations, plus some useful council tax income.

The key element is the price paid, with cost per plot remaining steady at around £9,000. That’s the foundation of Gleeson's decent profit margin and it's a cost that has remained steady for some time. Chief executive Jolyon Harrison stresses that there is no land cost inflation.

Gleeson also likes to keep its sub-contractors happy. It offers them an attractive incentive scheme whereby, if the quality and service they provide is good enough, Gleeson will settle all their invoices within 14 days of receipt. Achieving this sort of settlement helps to keep sub-contractors performing well to achieve this 'A' grade. Those operating at the other end of the scale are invited in for a difficult conversation. Paying up within 14 days presents no problem as Gleeson is debt-free and has cash on the balance sheet.

Selling these homes is helped by the way that Gleeson approaches potential customers. Many of these come from families that have never known anything but rented social housing and who have never really considered being able to own their own home. So, when a development is planned, Gleeson's reps canvass the local area, pointing out that a long-term mortgage works out cheaper than renting. And for those with no savings, it provides guidance as to how an extra hour’s overtime could soon help to build a deposit.

Gleeson also operates a land-promotion business, which brings land through the planning process and sells it 'oven ready' to larger housebuilders. These sites are in the south of England and, in the six months to December 2018, it sold three of them, the same as a year earlier. However, the latest sites were much bigger, with the potential to build 483 plots against 133 a year earlier. The increase in revenue generated was significant, up from £3.7m to £30.3m, while operating profits jumped from £2.3m to £9m.

True, returns from this arm can be lumpy, influenced by when a sale is completed. There are currently nine sites in the portfolio with the potential to deliver 2,432 plots. Seven of these are being progressed towards sale, although not all are likely to be sold in the second half of 2018-19. Including other sites awaiting consent or the outcome of an appeal, the portfolio has the potential to generate more than 22,400 plots.

Given the strong performance, the interim dividend has been lifted by 28 per cent to 11.5p a share. And as current guidance is for a one-third:two-thirds split between the interim and final dividend, this year’s payout could be 34.5p, which generates a yield of 4.5 per cent.

Unit sales in the first half were up 16.5 per cent at 691 units, and the group remains on target to achieve annual sales of 2,000 over the medium term. Overall, the pipeline comprises 13,000 plots, around half of which Gleeson already owns. More recently, it opened two new offices in Penrith and Ashington, taking the total to 10. At the December half-year there were 67 sales sites, and this is expected to rise to 70 by the middle of the year.