Housebuilder MJ Gleeson (GLE) is a rare combination of a company with growing margins and a strong sense of corporate and social responsibility.

Regeneration

On the one hand, the £196 million cap is in the business of providing high quality affordable housing to a working class customer base, predominantly in the north of England. On the other, Gleeson is successfully exploiting opportunities in the lucrative strategic land market in the south of the country.

When talking to management, it’s clear that Gleeson takes pride in its affordable housing model which focuses on estate regeneration; giving the builder access to a ready supply of brownfield land at which the major housebuilders would ordinarily balk. The group’s low average selling price (still under £125,000) puts home-ownership within the reach of normal working families in the north, with the majority of buyers coming from within three quarters of a mile of their new homes.

So aside from keeping communities together by offering local and affordable home-ownership, Gleeson also makes every effort to recruit labour for its developments from the communities they operate in.

This appears not to be at the expense of the performance of the business. Results for the six months to 31 December (25 Feb) showed group revenue up 24% to £42.6 million while operating profit rose 56% to £4 million. Those investors looking for income were also rewarded with a 145% increase in interim dividend to 2.7p. Gross margins in housebuilding came in around 29% and operating margin increased by 23% to 13%. The board is confident that it can continue to add to profitability, having - to some extent at least - already priced in anticipated rises to input costs such as labour and materials.

Meanwhile, the strategic land division recorded turnover of £2.4 million compared to £1.5 million in the same period a year earlier as a result of two land sales in the period, with a combined acreage of 16.5 acres. The division’s operating profit in the period was £800,000.

Looking forward in strategic land, chairman Dermot Gleeson points out that ‘there are currently ten sites in the portfolio with planning permission or a resolution to grant permission. Seven of these sites, which will deliver 797 plots, are being progressed for possible sale in the current financial year.’

Gleeson Homes should go from strength to strength with ambitions to build more than 1,000 homes per annum by end of financial 2017. The board expects to deliver growth in completions of around 30% this year, up on previous guidance of 25%. This implies 730 units for the full year.

(Click on chart to enlarge)

Insulation

Gleeson’s chosen field of play at the lower end of the market has to a large degree insulated it from vexing issues such as changes to the stamp duty regime. The group should also continue to benefit from a benign regulatory environment and the Help to Buy scheme - expected to run until 2020 - accounted for 43% of completions in the six months to December.

Concerns about changes to the political landscape in the aftermath of the upcoming general election are muted in Gleeson’s case. The major parties’ policies are almost inevitably likely to be supportive of the kind of builder that is successfully meeting a social need. A need, it might be added, that many of the majors are (perhaps understandably) reluctant to adequately address.

Analyst James Tetley at N+1 Singer says over the past 12 months, Gleeson’s share price has lagged peers despite a series of earnings upgrades and a forecast growth rate that is sector leading.

This, says Tetley, is unjustified and, given the scope for continued outperformance, he believes ‘the shares merit a P/E rating in the range of 11x to 13x FY17, which would imply an illustrative value of 410p to 485p.’

At 365p Gleeson still looks cheap with sustainable growth relative to larger sector peers.