Expansion And Operational Improvements Will Increase Future Housing Deliveries

Key Takeaways

• Gleeson's expansion in site openings and improved operational efficiencies are set to boost future revenue and net margins.
  
• Strategic land sales, planning consents, and project partnerships are expected to drive revenue growth and profitability.
  
• Increased incentives amid cost inflation and macroeconomic challenges may erode margins, with planning process delays potentially impacting future revenue growth.

Catalysts

Engages in house building, and land promotion and sale businesses in the United Kingdom.

• Gleeson Homes is continuing to increase its forward order book and has plans to accelerate site openings. This expansion is likely to positively impact future revenue and earnings as it supports growth in housing deliveries.
  
• The continued improvement and standardization in operations and commercial controls are expected to enhance efficiency and cost management, potentially increasing net margins over time as the company benefits from economies of scale.
  
• The partnerships business is developing rapidly, with targeted projects expected to complete soon. By diversifying market risks and leveraging operating capital, future revenue and profitability from this segment are anticipated to grow.
  
• Expected land sales in the latter half of the year at Gleeson Land, coupled with new planning consents, position the company favorably for future revenue growth and provide a pipeline for future developments, which could significantly enhance net earnings.
  
• Incremental increases in build cost inflation are being anticipated and managed, with future margins expected to recover as selling prices are potentially adjusted upwards and operational improvements are realized, positively impacting net margins and earnings.

MJ Gleeson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MJ Gleeson's revenue will grow by 15.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 6.1% in 3 years time.
• Analysts expect earnings to reach £32.7 million (and earnings per share of £0.56) by about March 2028, up from £16.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 16.9x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

MJ Gleeson Future Earnings Per Share Growth

Risks

• The company's gross margin was lower at 20.6% compared to the prior year, due to increased incentives and build cost inflation, which could impact overall profitability.
  
• Gleeson Land did not complete any sales in the first half, leading to a reported loss, which could adversely affect earnings if delays continue.
  
• The macroeconomic environment remains cautious with low business and consumer confidence and instability in mortgage markets, potentially impacting future revenue growth.
  
• Sales incentives have increased from 3.5% to 4.3%, which may erode net margins if such incentives persist over the longer term.
  
• The planning process remains challenging due to resource shortages in planning departments, potentially delaying site openings and impacting revenue growth projections.
  

Valuation

• The analysts have a consensus price target of £6.673 for MJ Gleeson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.04, and the most bearish reporting a price target of just £6.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £537.4 million, earnings will come to £32.7 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of £4.77, the analyst price target of £6.67 is 28.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.