A surprise drop in inflation and the Bank of England’s decision not to raise interest rates again have shone a light on the share prices of struggling housebuilders. MJ Gleeson could be the pick of the bunch.
The high costs of living and borrowing have made buying a home unattractive and often unaffordable for many people. Gleeson, like other property stocks, has been punished by the economic environment and lack of mortgage rate stability. However, prudent management and its unique position as a supplier of low-cost homes in northern England and the Midlands means it is suffering slightly less and capable of bouncing back quicker.
Gleeson isn’t like most other housebuilders. It buys cheaper land that nobody else wants in deprived areas in need of regeneration that have decent transport links. Saving money this way enables the company to construct quality homes at affordable prices and still make a decent profit. And by the time that it’s done, the area where new houses are built often becomes reinvigorated and more appealing.
Results for the 12 months to the end of June, while not particularly pleasing to the eye, did not contain any nasty shocks. The numbers were largely as expected and the overall message was, given the circumstances, fairly upbeat.
The cost of living crisis hasn’t been an entirely bad thing. Tough times gave management a chance to reflect on how to be a better business. It also made buyers of more expensive Bellway or Barratt homes aware that Gleeson sells similar quality property for less and frequently offers a wider variety of choice. That profile of customer, alongside a surge in bulk sales, helped to prop up revenues while the core clientele, first-time buyers, waited on the sidelines.
Management is now running a marketing campaign to appeal to a wider demographic and launching a shared ownership scheme to make it easier for people to get on the property ladder. Those measures, combined with steadying mortgage rates and continued appetite for multi-unit transactions, are expected to bring demand back to pre-crisis levels. And the company, armed with net cash of £5 million and a growing portfolio of new land to build on, has the resources to take full advantage.
Britain’s shortage of affordable housing is no secret. People have been talking about it for decades and years of cheap borrowing costs has made the situation worse. This gap in the market keeps getting bigger and Gleeson is one of the only companies addressing it.
The average selling price of its homes is £186,200 — 46 per cent less than what other new-builds go for in the regions where it operates. One of its two-bedroom properties can be bought for £106,500, making Gleeson homes potentially cheaper than renting, especially if you factor in energy bills.
But the company’s ability to profitably cater to a growing segment of the population that’s been priced out of the market or squeezed by high rents isn’t reflected in the share price. The premium rating Gleeson historically commanded for this status has been eroded. Now it trades in line with the rest of the sector.
Even after the recent post-results rally, the market cap is still 14 per cent lower than net assets and 28 per cent below the stated worth of the company’s inventory. At that price, hiccups should be tolerated and any hint of good news enthusiastically applauded.
As is often the case with value stocks, a turnaround won’t happen overnight. The housing market isn’t out of trouble yet and it could be a while before earnings return to previous levels. Fortunately, the current valuation accounts for that and there is a well-covered dividend, currently yielding about 3.3 per cent, to make the wait a little easier.
ADVICE Buy
WHY Gleeson should be trading at a premium to peers
Dunelm
Retailers selling discretionary goods generally aren’t at the top of investors’ shopping lists at the moment. Household names are dropping like flies and consumer purse strings keep tightening.
Dunelm has been an exception. In the year to July 1, the homewares retailer found ways to offset cost inflation without making consumers foot the bill, and delivered record revenues.
Normally, you’d call that defying expectations. Not at Dunelm. It’s now common knowledge that this is one of Britain’s best-run retailers. With such status comes even bigger demands.
A key component of Dunelm’s success has been focusing on value and appealing to a wider audience. The company broadened its product range, and unlike a lot of its peers cut prices. These measures reeled in more customers and boosted market share, encouragingly without causing much damage to profit margins.
Management admitted that consumer behaviour was “unpredictable” but remains confident that its value proposition will push enough volumes to deliver revenue and profit growth in the year ahead. Cheap prices aren’t its only arsenal. The opening of new stores should also help.
Online sales growth has unsurprisingly started to moderate, prompting Dunelm to accelerate the expansion of its physical presence. The plan is to open five to ten stores per year in 2024 and 2025, including in densely populated areas in London and southeast England.
The upside of a more inner-city focus could be huge. At the same time, it presumably exposes the company to higher rents and there might be question marks about the timing. Inflation and borrowing costs are still high and cash-strapped consumers may not be prioritising buying new curtains, bedding and furniture for a while yet.
Do these plans also rule out the chance of more special dividends? Peel Hunt reckons another one will accompany the interims in February.
Economic uncertainty carries risk but that’s reflected in the price. An impressive yield and handling of a tricky trading environment make the shares, trading at 14 times forecast earnings, worth holding on to.
ADVICE Hold
WHY The company is resilient and pays a decent dividend
