German broker Berenberg has initiated coverage on small cap builder MJ Gleeson PLC (LON:GLE) with a ‘buy’ rating and 740p price target, calling it a “stand-out UK builder”.
In early trading, Gleeson shares were 2.9%, or 19p higher at 675p.
In a note to clients, Berenberg’s analysts said: “We believe Gleeson has a cost leadership and market position that allows it to sustain profits at the high end of the sector and gives a clear path for continued growth.
“Its housebuilding business could easily double or triple in size over the next decade, in our view.”
They added: “Meanwhile, we think there is hidden value in its Strategic Land division, which, with recent transactions in the sector, could soon be realised.”
They noted that Gleeson is the only listed builder of ‘low-cost’ homes, with its average build cost of around £85,000 per house 60% below the sector average of £200,000.
That results in gross margins at Gleeson’s Homes division at the top end of the sector at around 33% despite selling at an average £126,000 compared to the sector on £310,000.
The analysts said: “We think that Gleeson’s cost model is the result of savings across the entire process, possible due to its deep knowledge of its customer base. We do not see it as easy to replicate, leaving Gleeson in a league of its own.”