A way to play the UK housing recover? MJ Gleeson

MJ Gleeson (GLE.UK)

Price: 100.25p (8/18/11)

This is a post for a contrarian, I'm going to highlight a company that most people would rather not invest with a company in the UK housing sector, MJ Gleeson.  The company has two divisions, a renovation division and a land division.

The renovation division takes brownfield areas and redevelops them into residential subdivisions.  I was a little surprised at the difference between a British subdivision and an American one, the homes were nice modest brick homes near city centers.  Contrast this to McMansions on the outskirts of cities, but I digress.  The company has a few programs to help buyers design and purchase their dream home.  MJ Gleeson appears to be the note holder of certain buyers as well.

The land division seems to be more of a land banking operation.  MJ Gleeson buys options on pieces of land and then improves the plots with the hope of making resale easier. The company prefers to buy land without the correct zoning and work to develop a master vision for parcels. 

Value Proposition

The company is a net-net ignoring the value of their land, they are also profitable (barely) and cash flow positive.  The following is the net-net worksheet:

With the price at 103p the shares have a 50% upside to NCAV from here.  Before discussing where value might exist with MJ Gleeson I want to take a look at a few operating notes:

• The home renovation division contributed 83% of the revenue but actually operated at a loss.
• The land bank division is 17% of revenue but accounts for all of the group's profits.
• The land bank group has a 47% net margin.
• The company sold one piece of land in 2010 verses two pieces in 2009.

So where is the value? The main investment thesis is that eventually the UK housing market will turn around making the renovation division profitable, in addition to increased land sales.  The problem is there is no idea on when the timing might be for a turn around.  MJ Gleeson has touted that sales in the renovation group are up but the profit hasn't come alongside it yet. 

The good news is that there is a margin of safety, the company is trading for less than the value of its cash, inventory and receivables.  This estimate of value doesn't take into account any consideration for the loans it holds, or the profitable joint venture interest.  So an investor who wants to bet on a UK recovery can buy MJ Gleeson at a significant discount and wait things out.  The company has been limping along and is cash flow positive meaning that there is a good chance the margin of safety won't become impaired.  The other good news is that once the market ticks upwards there is a good amount of operating leverage built into the business which could give a great boost to earnings. 

Concerns

Although this seems like a decent investment I have my reservations.  The first is that it is often hard to realize land value, while the land might be appraised at a certain value it's almost impossible to liquidate quickly and get anything close to book value.

The second concern is of profitability, the company's current period profits come from the interest in a join venture, and in the past in the height of the bubble the company's earnings were very lumpy as well.  I appreciate the discount MJ Gleeson is trading at, but I would need a silly cheap price to entice me to buy in.

Talk to Nate about MJ Gleeson

More Information:
MJ Gleeson Website
Financials

Disclosure: No position in MJ Gleeson.