MJ Gleeson – the pledge, the model and the cash generation

Over the last couple of years there has been a strong price rise in the cost of new homes.

In turn that has pushed buyers into buying ‘off-plan’ and well before the building has been completed.

In fact, some 37% or so of new builds were old ‘off-plan’ last year.

And that figure is being predicted to be nudging ahead even further. The last time they were that strong was in 2017 when almost half of new homes being built were sold this way. Tax and regulatory changes caused the subsequent lull before the surge in the last year.

Such strength in the overall UK marketplace would surely have helped to drive upwards the share prices of the country’s quoted housebuilding companies.

Signing The Pledge

However, their market values have been somewhat constrained, particularly by another factor – just how much will be their liability from the ‘cladding crisis’.

Last week a number of the UK’s leading players agreed to conform with the requirements that were being set down by the Department for Levelling Up, Housing and Communities.

Some 53 companies in the housebuilding sector have been asked to confirm that they were taking responsibility for the work required.

The overall cost of sorting out fire safety issues by removing and replacing cladding on buildings, of over 11 metres to 18 metres high, is estimated to be some £2bn.

As I write this Profile, I note that Bellway, Berkeley, Barratt, Vistry, Redrow, Taylor Wimpey, Countryside and Gleeson have all signed the pledge to perform or fund mitigation works on such of their developments.

Gleeson must be sighing some relief that it is now able to quantify its ‘hit’. It has set an internal deadline of assessing its costs. It only concerns 15 of the buildings in its legacy business.

That relief must be even better because it got out of this particular side of its business way back in 2005, that decision was made in order for the group to concentrate upon its low-rise, low-cost homes.

The business

Over the last ten years or so MJ Gleeson (LON:GLE), which employs some 122 people, has declared itself to be the fastest growing housebuilder on the LSE.

Serving the young, first-time buyers and low-income families has helped it to grow ten times over those years, meeting the growing insatiable demand for low-cost, affordable homes.

Gleeson Homes

This side of the business, in the year to end June 2021, reported £265.77m of sales revenue, making up 92.1% of the group total.

Its customer profile breaks down with two-thirds being key workers, some 80% being first-timers, with about 75% of its buyers being under the age of 35. Those who are going to be better off as owners rather than renters of their homes.

It is a great business and, of course, has a good social profile.

The group works with local authorities in identifying suitable sites, very often being ‘brownfield’ and in regeneration areas.

It is expecting to have built some 2,000 new homes in the 2022 financial year, developing from between 25 to 30 new developments.

The group’s geographic area is currently focused upon the North of England and the Midlands for its homes.

The Gleeson Homes Model

Some 80% of the group’s sites are in deprived areas, in need of regeneration.

The majority of its sites are ‘brownfield’.

Importantly, the sites are well located with good transport links and access to employment.

All of Gleeson’s homes are traditional brick and block construction.

The range includes two, three and four bedroomed houses.

They all have front and rear gardens, with driveways down the side of the houses.

Also important to note, is the fact that they work out significantly cheaper to buy than rent.

The average cost for Gleeson homes is £131,000 for a two-bed, £166,000 for a three-bed, and £216,000 for a four-bed house.

Furthermore, to its strength, the company has clear policy of what it does not do – it does not do flats, nor sell to investors, it does not offer part exchange, it does not develop in city centres and does not offer leaseholds.

Gleeson Land

The company has a second main side to its business, which is in land promotion in the Midlands and the South of England.

In 2021 its sales revenue was £22.81m, representing 7.9% of the group turnover.

Its projects stretch from Kent to Devon and into Worcestershire.

Gleeson Land boasts that it has a team of highly skilled planning, technical and land specialists, identifying development opportunities and working with stakeholders to promote the land through the planning system.

It aims to deliver attractive residential developments in areas where housing demand is high. It works closely with landowners, land agents, local authorities and communities to secure residential planning consents that are both sustainable and sensitive to local needs.

At the half-year end there was a pipeline of 71 sites and totalling around 21,155 plots. It had three sites consented, upon which 1,234 plots could be delivered.

Due to the national planning system being somewhat congested the land side had some 15 sites which were awaiting a planning decision.

Its business is in selling on consented land to medium and large housing developers in the South of England.

This highly profitable, cash generative division of the group undertakes no land ownership and thereby suffers no land risk.

The Equity

There are 58.3m shares in issue.

Larger holders include Harwood Capital (10.4%), Schroder Investment Management (8.22%), Sanford DeLand Asset Management (7.99%), Polar Capital (4.13%), JC Cooper (3.87%), Highclere International Investors (3.84%), Royal London Asset Management (3.69%), Canaccord Genuity Wealth (3.56%), and Sheila Macdermot (2.42%).

Broker’s View

For the year to end June 2022 analyst James Tetley at Singer Capital Markets estimates £367.7m sales (£288.6m) and adjusted pre-tax profits of £49.1m (£41.7m), worth 67.8p per share in earnings (58.1p) and a dividend of 18p (15p).

For the coming year he goes for £418.9m revenues, £55.4m profits, earnings of 73.2p and a 21p dividend.

He rates the group’s shares as a ‘buy’, with a price objective of 1000p.

Over at Liberum Capital their analyst Charlie Campbell also rates the shares as a ‘buy’ but looking for 1080p.

My View

This group proudly considers that its mission is simple – ‘we build affordable, quality homes, where they are needed, for the people who need them most’ – informative, impressive and progressive.

The UK Government still has a target of building 300,000 new homes a year – it has some way to go yet.

But that figure is based upon the considered requirement for the UK population in the near future.

It gives housebuilders an attractive pillow for their own future plans.

I have always been a big fan of redeveloping ‘brownfield’ sites and Gleeson has a certain pedigree in doing just that – which is why they are well received by the planning departments of local authorities in areas of greatest demand.

Just a year ago this group’s shares were trading around the 900p level.

In the last few weeks, they have been as low as 572p, but on Friday night they closed at 613p, reflecting better news on the ‘cladding’ issue.

I consider that they are undervalued currently and will be back up to the levels of a year ago in due course.

However, for the time being my Target Price is 750p.