Tap into defensive Gleeson

Gleeson builds homes in the north of England that are in the reach of low-income first-time buyers. In the year to June its average selling price was £128,900, which compared with £125,200 in the prior year. The housebuilder sets itself apart from other UK-listed groups with the buyers it targets. Two-thirds of customers used the government’s help-to-buy scheme last year and the lower average sales price means the vast majority of target homebuyers will still be able to access these funds once regional price caps are introduced for the scheme from April 2021. The lowest cap is £186,100 in the north-east. Indeed, the highest price home Gleeson sold last year was £199,995 and 99.9 per cent of houses sold would have been below the proposed regional price caps. 

While sales volumes for some housebuilders have faltered over the past 12 months as buyers have been deterred by a stalling market – particularly in London and the south east of England – Gleeson Homes has continued to enjoy impressive growth and expects more to come. Last year alone sales volumes were up a quarter at 1,529 and have grown at a compound annual rate of 19.2 per cent over the past three years. Management is targeting annual unit sales of 2,000 by 2022. 

With that in mind, management plans to expand its sites to the West Midlands and Lincolnshire, which are soon to open. The land bank also grew by 723 plots to 13,575 during the year. Investing in growth was a drag on profits, though. As expected, accelerating the rate of new builds on existing sites and investment in new sites meant the operating margin for Gleeson Homes declined to 15.3 per cent last year, from 17.1 per cent. The group also had to contend with some higher build costs and the gross margin fell from 32.7 per cent to 30.1 per cent. Interim chief executive James Thomson said the group expects to maintain the gross margin at around 30 per cent this year.

Expanding operations also meant investment in working capital was up by almost 150 per cent at £27.9m. This contributed to an £11m drop in net cash to £30.3m, although that should still be grounds for confidence that the generous dividend payments will be maintained. Admittedly, Gleeson's capital returns have not been as impressive as those of larger housebuilders such as Persimmon (PSN) and Taylor Wimpey (TW.), but the annual dividend has still grown by a compound annual rate of 41.9 per cent over the past five years. The board aims to maintain ordinary dividend cover at between 1.75 and 2.75 times earnings, with cover of 1.77 times last year. 

Gleeson also operates a land promotion business, which it has decided to retain following a strategic review. The business brings land through the planning process and sells it 'oven ready' to larger housebuilders, focused on the south of England. Admittedly, sales from this business can be lumpy and operating profit growth has been less impressive than for the housebuilding operations, rising just 3 per cent last year to £13m following nine land sales.