Houses, and therefore housebuilders, are never far from the front pages. The stakes were raised after the mini-budget, which sent mortgage interest rates rocketing and builders’ shares plummeting.
The sector was dragged down fairly uniformly, but not all builders are the same. MJ Gleeson’s concentration on low-cost houses for first-time buyers and ex-council tenants, often on the national living wage, in the north and Midlands has arguably led investors to underestimate it. But, just as many people are buying no-frills groceries, Gleeson is benefiting from buyers moving downmarket to counteract dearer mortgages.
This column recommended buying the shares in September 2019, at 754p. They rose promisingly to 939p by February 2020 but then Covid struck and the rest is history. The cost of living crisis this year has hammered the price down to 406p, a six-year low.
Gleeson was founded in Sheffield in 1903 by an Irish bricklayer. The biggest of its two divisions is Gleeson Homes, which specialises in building affordable homes in northern England and the Midlands. A smaller operation, Gleeson Land, works in the southeast with individuals, farmers, businesses, charities and public sector organisations to maximise returns from their land’s development potential.
The housebuilding side often takes sites that competitors do not want because they do not fancy the location or there may be planning or other complications driving down prices. That, combined with efficient construction methods, gives it similar margins to larger firms despite lower selling prices. Its average price recently was £167,300 against Bellway’s £283,000 in the same regions, while Gleeson’s margin was 15 per cent compared with Bellway’s 17.5 per cent.
In the annual results to June 30, published last month, group revenue was 29.4 per cent higher at £373.4 million, taking pre-tax profit up 33.1 per cent to £55.5 million.
But that was before a £12.9 million exceptional building safety cost provision related to the Grenfell fire. Like the rest of the sector, Gleeson has had to pay an extra 4 per cent residential property developers’ tax towards the cost of dealing with defective cladding. And that may not be the end of it. Last month Gleeson added: “We are in the process of undertaking a programme of intrusive inspections and fire-risk assessments.”
In the financial year, Gleeson sold 2,000 homes, 188 more than the year before, and gross profit margin on homes sold was 29.0 per cent. Gleeson Land sold six blocks out of a 71-strong portfolio. Its operating profit was £11.1 million, the same as the previous year.
A new chief executive, Graham Prothero from Vistry, arrives in January and will face the looming end of the government’s help-to-buy scheme. Launched nine years ago, it helps buyers of new-build homes to put down a deposit of as little as 5 per cent, with a further 20 per cent of the sale price covered by a loan. But noises made by the new housing secretary, Simon Clarke, about a smaller state do not encourage hopes that the scheme will be continued.
Charlie Campbell, a Liberum analyst, reckons that demand for Gleeson homes remains robust and this will continue. “Its homes are 40 per cent cheaper than peers’ and it is cheaper to buy than to rent,” he says. “We nudge up 2023 estimates and expect profit growth as outlets increase and demand holds up.”
Investec also rates the shares a buy, predicting earnings per share rising from 77.9 to 83.2 over the next three years. That would take the p/e ratio down to 5.6, and the dividend yield to 4.6 per cent.
ADVICE Hold
WHY The shares are sound value, but the end of help-to-buy would be a body blow
Spire Healthcare Group
Record NHS waiting lists are turning investor attention to the private healthcare providers, and Spire Healthcare Group is one of the country’s largest.
Spire has 39 private hospitals and eight clinics in England, Wales and Scotland, working in partnership with about 8,150 consultants. Last year it provided personalised care to almost 870,000 in-patients and day patients. It is the UK’s leading private provider of knee and hip operations.
Last month the company reported half-year numbers, with revenues of £597.9 million up 7.1 per cent on a year ago, and adjusted ebitda (earnings before interest, tax, depreciation and amortisation) of £105.8 million, up 10.2 per cent. The after-tax loss came down from £16.9 million to £600,000.
Justin Ash, chief executive, said: “Fundamental changes are under way in UK healthcare, leading to strong growth in Spire’s private revenues. I am looking forward to Spire’s expansion into community-based clinics and extending our private GP provision.”
This column said in July last year that the shares were a hold at 220p, since when they have stayed in the tramlines between 200p and 250p. Spire rejected a 240p-a-share bid that month from the Australian firm Ramsay Health Care despite it being supported by the biggest shareholder, Mediclinic International, owned by the South African billionaire Rupert family.
In 2017 Spire paid £27.2 million to 750 victims of the disgraced former breast surgeon Ian Paterson. However, the firm has signed a new four-year agreement with Bupa to provide services to its UK health insurance customers.
Subject to the timing and severity of any future Covid wave, Ash expects more good revenue and profit growth for this year, with an improvement in margins. The analyst consensus is for earnings per share of 4.5p this year and 8.8p for 2023, suggesting a 24.2 forward p/e ratio, possibly accompanied by a return to dividends.
ADVICE Hold
WHY An encouraging recovery, but many questions remain
