The UK's homebuilders have benefitted significantly from rising home prices and increasing demand since the financial crisis, but there is one company that is better positioned than most to continue growing as the market matures, say City analysts.
MJ Gleeson (LSE: GLE) is one of the UK's mid-tier builders, but size hasn't held it back. Since its initial public offering at the end of 2014, shares in the company have returned 63%, outperforming all of its major peers.
This outperformance looks set to continue according to analysts, with one group in the city branding Gleeson a "standout" UK housebuilder. The reason why analysts believe Gleeson could keep growing while its peers see a slowdown is because of the firm's target market.
Gleeson is the only listed builder of 'low-cost' homes, with an average build cost per house 60% below the sector average of £200,000. This low-cost target market means that gross margins for its homes are at the top end of the industry at around 33%, despite selling at an average of £126,000, below the sector average of £310,000.
Put simply, Gleeson should be able to continue to offload its low-cost new-builds to first-time buyers who are priced out of the rest of the market, ensuring that the company can continue growing despite sluggish demand elsewhere. Analysts believe this low-cost orientation could allow the company to double or triple its housebuilding business's sales over the next decade.
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All in all, the low-cost argument makes Gleeson look like an extremely attractive investment opportunity. While some analysts are worried about the state of the UK housing market, particularly how much longer home prices can continue to rise as wages stagnate, these concerns do not necessarily apply to Gleeson. As the company targets the lower end of the cost curve, it can be argued that through all economic environments, demand for its buildings will remain robust. While first-time buyers could be the target market today, if the market turns down, there will still be other customers looking for lower-cost options.
Unfortunately, the market has already realised Gleeson's potential, and shares in the company are not as cheap as some of its peers. Indeed, at the time of writing shares in Gleeson are currently trading at a forward P/E of 13.5 falling to 12.1 for the fiscal year ending 30 June 2018. The shares support a dividend yield of 3.2% at present, and the payout is covered more than twice by earnings per share, leaving plenty of room for dividend growth or special payouts.
Overall, if you're looking for a play on the UK housing market, but are worried about the state of the industry as we move towards Brexit, Gleeson could be a solution. The company will continue to profit if home prices keep steadily rising and if the market falters, it's better positioned than most to weather a downturn. The downside is limited , but the potential upside could be enormous.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.