MJ Gleeson is a £500m market cap UK housebuilder that redevelop brownfield land in low socioeconomic areas in the North and Midlands of England. Their low-cost properties give young and low-income families the opportunity to own a home for weekly mortgage payments less than the price of a similar rental. MJ Gleeson also operate a strategic land division in the South of England, aimed to increase group margins. This division utilises managements experience in the industry to efficiently attain planning permission on land which is then sold to external developers.
The UK is currently experiencing a housing shortage –The UK government estimates, to offset previous undersupply and keep up with a rising population, 300k new homes need to be constructed annually by 2025. This would represent a 10% CAGR from 2019’s production of 170k new homes.
Government schemes have been introduced to increase construction of affordable housing – Schemes such as Help-to-Buy are incentivising families to buy, and increasing the affordability of, new build homes. Over 99% of MJ Gleeson homes will be eligible for the reduced-price cap which remains until 2023. The government has also introduced investments such as the affordable homes project and brownfield land fund which are estimated to produce an additional 200k new homes over the next 5 years in key regions MJ Gleeson operate.
Young people and low-income families want to get on the property ladder, but high prices are preventing them – Since 1995, the average price of a UK house has risen c.150%. Significantly higher than the c.20% increase in average household income for families aged between 25-34. With young families finding it harder to enter the property ladder, the number of UK households in rented accommodation increased from 2.8m to 4.5m over the last decade. A recent Ipsos MORI survey found that 79% of rental tenants aged between 16-34 would rather own a home than rent.
MJ Gleeson’s model of redeveloping brownfield land provides a cost advantage– As brownfield land requires the removal of existing infrastructure, it is more difficult to develop and less profitable for the standard housebuilder. This reduces the competition MJ Gleeson face in the land bidding process. The business’s bids also contain intangible positives, such as committing to using local materials/labour where available and a strong reputation built by over 100 years of experience of development in partnership with local authorities. This means MJ Gleeson are often able to acquire plots at a discount to market value. Note below how this strategy of brownfield land in low-cost areas results in MJ Gleeson having a significantly lower average sales price than other listed housebuilders.
In the 4 years between 2015-2019, MJ Gleeson grew revenues at a CAGR of 21%, had relatively consistent operating margins averaging 19% and increased EPS at a CAGR of 28%. Through the period the group increased its dividend pay-out ratio from 31% to 56% and on average yielded a 3.5% dividend.
In 2019, the last undisrupted year of trading, MJ Gleeson’s housebuilders division sold 1,529 houses at an average sales price (ASP) of £129k. Management’s strategy is to keep ASP low and focus on growing unit sales. You will note below that ASP has remained relatively flat, growing at a 2% CAGR between 2015-2019, while houses sold increased at a CAGR of 28% over the same period of time. Management guide for 2,000 annual completions by 2022, with a short-term rise in ASP as an unusual proportion of larger homes are sold through covid.
While growth in the strategic land division is more varied, plot sales have averaged a CAGR of 30% between 2015-2019. By generating operating margins in excess of 25%, the division continues to add high margin revenue to the group’s operations, indicating potential group margin expansion in the future.
|Average Sales Price||£121k||£126k||£123k||£125k||£129k||£131k||£144k|
|FY21 Forecasts in Bold|
In the opinion of Middleton Enterprise, MJ Gleeson are a high-quality, socially responsible business whose niche operating model will benefit from the increased demand of affordable housing in the medium term.
While COVID-19 reduced the group’s performance in FY20, the desire to swap city life for gardens has provided a short-term tailwind to the businesses in FY21. The government’s commitment to ‘build, build, build’ the UK out of a recession, with a particular focus on ‘levelling up’ the regions, makes MJ Gleeson a prime candidate to benefit from government support through the next cycle. MJ Gleeson’s focus on affordable housing also minimises their exposure to the standard business cycle. When lending restrictions tighten and incomes fall, the business sees resilient demand as consumers seek to reduce weekly housing costs/are pushed into their price bracket.
Middleton Enterprises believe that managements strong track record, backed by the aforementioned trends, will allow the business to perform through the next cycle and beyond.
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