The market has not yet understood MJ Gleeson and its unique attractions, in our view. The group is in good positions and in strong markets in both segments of the business. There is cash to expand and the prospects have improved with the housing white paper (February 2017).
Written by
MJ Gleeson |
On track and raring to grow
|
Household goods |
QuickView
6 March 2017 |
Share price graph
Share details
Business description
Bull
Bear
Analysts
|
||||||||||||||||||||||||
The market has not yet understood MJ Gleeson and its unique attractions, in our view. The group is in good positions and in strong markets in both segments of the business. There is cash to expand and the prospects have improved with the housing white paper (February 2017).
Taking the opportunity to grow
A positive first half report from the company confirmed that it is on track to hit 2016/17 expectations. It has shown indications of ambitious growth. The key driver of the business, affordable housebuilding for sale, showed revenue growth of 9% in H117 to £55m and a 10% rise in operating profit to £9m. The strategic land promotion operation created good cash flow and while revenue fell 44% to £8m operating profit was roughly stable at £4m. The company indicated that demand for its houses and land remains at a high level. There is support for home buyers through several schemes, including Help to Buy.
Creating growth capacity
The company is investing in growing affordable housing for sale. It will build over 1,000 units in the current year (451 in H1). The pace of change depends on how the current seven divisions expand their operations to get to, say, 250 units each pa. The company had 10,454 dwelling plots owned and controlled at the end of December. Investment has been made in the operations with three regional heads managing the seven existing divisions; three more are soon to be added in Cumbria, Northumberland and the West Midlands. The relevance of the strategic land promotion operations should not be ignored; the goal, however, appears to be to maintain a steady state at c £10m pa operating profit. Growth is to be driven by the affordable houses for sale.
The valuation ignores the prospects, in our view
Valuing land developers and housebuilders depends on the economic cycle. The mainstream external view is that housing is set for growth in volume and prices in the mid-term. The GDV of the owned and controlled land is £1.3bn (number of plots x £125,000 ASP); at a 20% net margin, that is worth £260m, pre-tax. The current hurdle rate is above 20%, although the actual level in H117 was 18%. The EV is £310m at close on 3 March 2017. The 21,256 potential plots in the strategic land promotion operations are difficult to value. In P/E terms, the stock trades on a 13.3x prospective, which is above the average of 10x, but so is the likely growth rate.
|
Consensus estimates
Source: Bloomberg |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
|
Disclaimer
|
|
Disclaimer
|
Research: Consumer
Given Greggs’ long track record of strong cash generation and the success of the 2013 strategic plan to date, it seems reasonable to look beyond the short-term impacts of input cost rises and government-imposed cost increases to the benefits expected from the current investment programmes. Employing a DCF model to do precisely that, we generate a valuation of 1,226p per share.