Screening director and senior manager share dealing announcements, plenty of them appear to be options related – these are typically grants to key employees where such incentives make them able to capitalise if the share price rises, but there is no downside risk if it falls. This is not exactly reassuring versus the key question currently of whether higher interest rates result in recession.
So it is notable how at Sheffield-based housebuilder MJ Gleeson (LSE:GLE), the chair and the senior independent director have purchased nearly £50,000 of stock at 407p and 398p respectively, with the latter director taking a further near-£29,000 worth at 408p.
This was as soon as Gleeson exited its restricted period after releasing annual results to 30 June, as if they thought the stock could go higher. With a possible further rise in interest rates looming, yesterday Gleeson eased 3% to 394p before firming to 397p today.
Hopes for better autumn trading
Despite a swift slide in profits as the housing market has slowed, Gleeson’s management proclaims: “With a steadying mortgage market and the implementation of a range of sales initiatives, including shared ownership, we anticipate an increase in our net reservation rates during the autumn selling season.”
The smaller land division – acquiring and trading sites for example to other builders is also said to have: “…started the financial year in a stronger position with six consented sites and completion of sale of one significant site. Demand for consented sites remains strong and further site sales are anticipated during the year.”
I upgraded my stance on Gleeson to “buy” at 383p in July, chiefly because I like this builder’s strategic emphasis on affordable homes. Also, a 20% discount to net tangible asset value (NTAV) of 477p a share offers an aspect of “margin of safety” and scope for upwards mean-reversion when sentiment towards housebuilders eventually improves.
From a 22 August low of 353p, Gleeson has enjoyed quite a rally, albeit the fourth such in a year – where the overall context remains trading sideways.
This is in a 10-year context of a strong bull run from 110p in May 2012, which like all housebuilders benefited from ultra-low interest rates and Help to Buy. Such an exceptional macro context has changed, hence market valuations are groping for what might be the new reality. After a 964p peak in January 2020, Gleeson retraced by 600p, or over 70% of a near eight-year rally to 364p. Yet I find it misguided to benchmark against an exceptional period.
Yes, a fundamental shortage of UK housing remains, but mortgage rates may have undergone their own mean-reversion, leaving buyers having to cope with high prices (historically, as a multiple of incomes) besides cost-of-living increases.
‘Profits crumble as first-time buyer demand falls’
This tended to be the headline reaction to last Thursday’s results, which frankly needed a better explanation of the profits slide. It shows why the market swiftly became wary of housebuilders as macro clouds darkened, de-rating many stocks to single-figure price/earnings (PE) ratios and high single-digit yields.
Gleeson’s annual number of homes sold fell nearly 14% to 1,723 and reservations also slowed over summer, yet profit fell over 43% to below £32 million before tax and exceptional costs. Management says the chief impact was in the October to December 2022 quarter after September’s mini-budget pushed up mortgage rates sharply.
Gleeson responded with a pause in land buying, delay in new sites and firm control of build activity. Over £3 million in annual costs were taken out, for example, reducing the number of regional management teams from nine to six, plus redundancies.
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They cite increases in material and labour costs, albeit average inflationary cost increases of 3.4%, which does not fully account for the profits drop.
The main dent came from a slump on the (inherently lumpy but smaller) land trading division, which is exposed to general changes in the market. The sale of three sites (leaving 70) versus six from the last financial year meant a collapse in divisional operating profit from £11 million to £1 million. Its portfolio currently offers scope for 17,931 plots, down 12% on last year due to sales. Some 25 acres of commercial land remains stable.
While overall revenue fell 12%, actual housebuilding eased just 4% to £321 million. A 14% fall in the number of homes sold to 1,723 was mitigated by an average 8% price increase to £186,000. It is therefore a concern should a recession follow, we are yet to see a worst-case scenario of stalled demand and falling prices.
Existing homeowners drive recent demand
Another notable upshot is twice the number of Gleeson home reservations coming from people over 55. First-time buyers in the second half (January to June) were only around 50% of the total versus 80% normally, while over 55-year-olds doubled to 20%.
It reflects a polarising market as older people have benefited from soaring asset prices and are now downsizing. This I find a concern because housing market experts say that first-time buyers are its key foundation.
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Yet Gleeson contends: “Structural under-supply of homes in the UK will continue to ensure strong demand...the cost of renting continues to out-pace the cost of buying a new Gleeson home.”
Management is in line with economists, who say interest rates are near their peak as inflation begins to fall. I still wonder if a further small increase is on the cards given enough people’s wage rises are comfortably pegging inflation.
Should you take notice of consensus forecasts?
For the current year to June 2024, an 8% revenue rise is projected, albeit earnings per share (EPS) 4% lower at 40p, with net profit to recover to £26 million in June 2025 and for EPS of near 47p.
Consensus forecasts are probably on the right track, certainly if the real damage in this downturn was a year ago and the housing market now muddles through. I tend to think in terms of event probability; this one being a 60% to 70% scenario, but we should not dismiss lower odds of worse to come.
On a circa 12-month forward basis, one could therefore regard the PE multiple as just over nine, and a held 14p dividend in respect of 2024 implying a 3.5% yield – not much behind the hopes for Barratt Developments (LSE:BDEV) at 4.1%, although behind Persimmon (LSE:PSN), which offers 5.8% with 1.5 times earnings cover.
I take all such with a pinch of salt, yet is why some housebuilder equities have fallen below NTAV, helping offset uncertainty.
MJ Gleeson - financial summary
Year-end 30 Jun
|Turnover (£ million)||142||160||197||250||147||289||373||328|
|Operating margin (%)||19.8||20.6||18.7||16.4||4.0||14.9||11.8||9.9|
|Operating profit (£m)||28.2||33.0||36.9||41.0||5.9||43.1||43.9||32.5|
|Net profit (£m)||23.0||26.2||30.2||33.3||4.5||33.9||35.1||24.2|
|EPS - reported (p)||43.1||48.3||55.2||60.4||8.6||58.1||60.1||41.5|
|EPS - normalised (p)||43.3||48.5||55.4||60.6||9.3||58.3||87.0||41.8|
|Operating cashflow/share (p)||25.7||35.6||39.7||15.5||-26.1||41.5||20.3||-24.7|
|Capital expenditure/share (p)||1.7||2.2||2.5||3.4||4.3||6.6||6.3||7.6|
|Free cashflow/share (p)||24.0||33.4||37.2||12.1||-30.4||34.9||14.0||-32.3|
|Dividends per share (p)||14.5||0.0||32.0||34.5||0.0||15.0||18.0||14.0|
|Covered by earnings (x)||3.0||0.0||1.7||1.8||0.0||3.9||3.3||3.0|
|Return on total capital (%)||18.4||19.1||18.7||19.3||2.6||17.1||14.9||10.8|
|Net debt (£m)||-23.2||-34.1||-41.3||-30.3||-16.8||-34.3||-30.8||-5.2|
|Net assets (£m)||153||171||188||204||213||245||272||286|
|Net assets per share (p)||283||317||345||374||366||420||467||490|
Source: historic company REFS and company accounts.
Net assets per share up 5% in a year to 490p
This increase in net asset value means the shares trade on a 18% discount, although that’s not as much as Crest Nicholson Holdings (LSE:CRST) on a near 46% discount with the shares at 330p.
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Gleeson’s balance sheet is pretty clean: £286 million net assets reflecting inventories (land and work-in-progress) up 20% to £325 million. Cash, however, has fallen from £34 million to £5 million as inventories rose and payables were cut. There is no debt albeit an unused £135 million bank facility which tempers concern at recently low cash – lest opportunities arise.
Overall, I continue to like this builder’s focus on smaller low-cost housing – said to be affordable by couples earning lower wages. Gleeson should also be able to catch buyers trading down from higher-priced new homes. A recent (pre-completed) sale of 288 new homes to two investment groups also shows exposure to the rental market as affordability remains a compromise for some buyers.
I therefore retain: Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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