Tighter Lending And Ageing Demographics Will Constrain Housing Demand

Key Takeaways

• Shrinking first-time buyer demand and tighter mortgage conditions threaten core sales growth and long-term earnings stability.
  
• Rising regulation, regional focus, and industry cost inflation undermine margin resilience and future profitability.
  
• Strong operational discipline, favorable market trends, and successful land strategy position the company for margin recovery, scalable growth, and sustained demand for entry-level homes.

Catalysts

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

• Persistently high interest rates, combined with tighter lending standards, are likely to make mortgages less accessible for first-time buyers, which could severely constrain Gleeson's core market and lead to reduced sales volumes and lower revenue growth over the coming years.
  
• Demographic shifts in the UK towards an ageing population are expected to shrink the pool of first-time buyers, eroding the long-term demand for the entry-level housing that makes up the majority of Gleeson's business, with significant negative implications for sustained volume and earnings growth.
  
• Anticipated increases in environmental regulations and future decarbonisation requirements are set to drive up compliance and development costs for new homes, putting further pressure on already thin gross and net margins, and undermining Gleeson's ability to maintain a compelling price advantage.
  
• Divisional concentration in Northern England and the Midlands continues to expose the company to region-specific economic downturns, increasing earnings volatility and threatening consistency of cash flow and profitability as national economic activity becomes more uneven.
  
• Structural labour and materials shortages across the UK construction sector are likely to cause ongoing cost inflation, particularly in skilled trades like groundworkers, pushing up build costs and making it increasingly difficult for Gleeson to defend its margins and deliver the forecast rebound in profitability.

MJ Gleeson Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MJ Gleeson compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MJ Gleeson's revenue will grow by 16.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.7% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach £29.6 million (and earnings per share of £0.5) by about July 2028, up from £16.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the GB Consumer Durables industry at 13.3x.
• 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 8.36%, as per the Simply Wall St company report.

MJ Gleeson Future Earnings Per Share Growth

Risks

• MJ Gleeson has a strong and growing land pipeline, with 19,000 plots secured and a disciplined approach to land acquisition, which provides clear visibility and capacity for medium-term volume and revenue growth as the market recovers.
  
• The company is focused on operational efficiency and cost control, with evidence of successful restructuring, standardisation, and reductions in overheads and headcount, which sets the stage for an improvement in net margins as lower-margin sites are completed.
  
• There are early signs of margin recovery, with management expecting gross margins to rebound in the coming periods due to higher-margin sites coming online, steady or increasing underlying selling prices, and an anticipated reduction in the need for sales incentives, supporting higher profitability.
  
• Demographic and affordability trends remain supportive, as Gleeson customers spend well below the national average on mortgage costs, and with continued increases in the national living wage, the demand for entry-level homes is likely to continue, underpinning revenue stability and growth.
  
• The partnership strategy and increasing success in Gleeson Land, driven by regionalisation and enhanced reputation, is delivering a higher bid and win rate and supports both diversification of revenue streams and scalability, which can drive improved earnings and return on capital over the long term.

Valuation

• The assumed bearish price target for MJ Gleeson is £3.75, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of MJ Gleeson's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.17, and the most bearish reporting a price target of just £3.75.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £558.5 million, earnings will come to £29.6 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of £3.71, the bearish analyst price target of £3.75 is 1.1% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.