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Consider a move for this house builder while prices are nailed down

Contractors work on houses under construction at the Toll Brothers Regency Ranch at Folsom housing community in Folsom, California, US, on Tuesday, May 16, 2023. Toll Brothers Inc. is expected to release earnings figures on May 24. Photographer: David Paul Morris/Bloomberg
Contractors work on houses under construction at the Toll Brothers Regency Ranch at Folsom housing community in Folsom, California, US, on Tuesday, May 16, 2023. Toll Brothers Inc. is expected to release earnings figures on May 24. Photographer: David Paul Morris/Bloomberg

The house builder and land development specialist MJ Gleeson comes with a lot of the features that this column looks for when it is researching portfolio picks: an addressable market where there is a long-term need and the company has a strong competitive position; a very strong balance sheet; and a share price chart that goes from the top left to bottom right, which in turn suggests the shares could be cheap.

Finding a near-term catalyst to get the share price going may not be that easy, given the uncertain economic backdrop here in Britain.

Patience will be required, but the net cash balance sheet will provide some downside protection and although it felt like we had erred by selling too early last time we looked at MJ Gleeson in the spring of 2018, that enabled us to bank a near-40pc total return, including dividends, and the shares have subsequently fallen sharply. Hopefully moving early will bring its returns on this occasion, as well.

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Valuation was the key to our decision to cut and run then and it has prompted our decision to take a second look now. Back in March 2018, the shares traded at 2.4 times historic net asset value (NAV) and two times forecast NAV.

Now, after a prolonged share price slide, they trade at 0.9 times book value, given a market cap of £247m and net assets of £272m, as of the fiscal first-half that ended in December. Note also how the company’s inventory of £327m exceeds its stock market valuation by some distance.

Like its larger FTSE 100 and FTSE 250 building peers, MJ Gleeson faces many challenges, as the mortgage market looks to recover from the chaos caused by Trussonomics, interest rates rise and inflation adds to its cost base while knocking consumer confidence.

As a result, completions fell 4pc year-on-year in the first half to the end of December, while both reservations and forward order book were down in the run-up to Christmas. Sales from the land bank in the South have slowed, partly because of the economic environment and partly as a result of planning protocols. The FTSE All-Share constituent has also had to set aside £12.9m to cover cladding remediation costs and fire inspections in the wake of the Grenfell Tower disaster.

But long-term demand for quality housing is assured and MJ Gleeson targets a particular niche, namely affordable properties in the North and Midlands. Its average selling price is £186,400, according to February’s first-half results, well below the near-£300,000 average of its quoted peers.

While the closure of the Help-to-Buy scheme is not helpful, the low selling price means MJ Gleeson is not entirely dependent upon it and increases in the national living wage could help potential buyers, especially first-time ones.

A forecast dip in completions to 1,650 to 1,850 homes in the current trading year from 2,000 in the last one means earnings will fall in the year to June 2023. Management has already sanctioned a cut in the interim dividend to 5p a share from 6p a year ago and analysts have pencilled in a reduction in the full-year distribution from last year’s level of 18p, not least as Graham Prothero, the chief executive, has reaffirmed plans to keep earnings cover in the region of three to five times.

Even so, the forecast dividend yield exceeds 3pc, according to consensus forecasts, and analysts currently believe both earnings and the dividend will start to grow again in the year to June 2024. In Questor’s view, MJ Gleeson could be an interesting value pick.

Questor says: buy

Ticker: GLE

Share price at close: 425p

Update: Hunting

Weak oil and gas prices are hitting active rig numbers in America and in the process drilling a hole in our investment case for energy equipment and services specialist Hunting.

A withdrawn bid for sector peer Wood Group is not helping sentiment either, but we are still in the black since buying in January last year. Yesterday’s rise to earnings guidance for offers encouragement and, after the sharp share price falls of the past year, the £370m market cap represents a hefty discount to the stated book, or net asset, value of £680m.

Such a lowly valuation provides some downside protection and orders such as the multimillion contract from India suggest the oil equipment and services market is not as dormant as many believe. Time to go hunting for Hunting shares again.

Questor says: buy

Ticker: HTG

Share price at close: 228.5p


Russ Mould is investment director at the stockbroker AJ Bell

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

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