RBC Capital downgrades MJ Gleeson after profit warning

"Gleeson issued an unscheduled trading update this morning reducing profit expectations for the year ending 30 June 2025 and 30 June 2026," it noted.

"We have reduced our estimates to reflect lower gross margins, and lower volumes from FY26-27E. We reduce our implied price target from 650p to 425p, and downgrade our rating from ‘sector perform’ to ‘underperform’."

Gleeson said in an update on Tuesday that the pace of housing market recovery has not been sufficient to offset the cumulative impact on Gleeson Homes' gross margin of a number of headwinds during the year. These include build costs, flat selling prices, and the continued use of incentives.

The group had hoped that a land sale from its East Yorkshire division would cover the shortfall, but the sale fell through leaving the profit gap.

The company also flagged that despite the changes made by the Labour Government to the planning system, its business is still being negatively impacted by planning delays.

"It seems to us that local authorities are being slow to adopt the new planning rules," said RBC. "Therefore, Gleeson expects to be selling off fewer sites in FY2026 than it had previously anticipated."

The bank cut its operating profit estimates by 17%, 15% and 16% in FY25E, FY26E and FY27E, "reflecting i) lower gross margin estimates (driven by slightly lower ASPs and higher build cost inflation assumptions), and ii) lower volumes (driven by lower site numbers in FY26E and FY27E, partially offset by higher bulk activity".

RBC said: "In our view today's reset painted a picture of ongoing challenges rather than drawing a line under a specific issue. Planning delays hurt smaller housebuilders the most as a small number of delays can have a large impact on financial performance. We are also wary about Gleeson using bulk deals to grow volumes at a time when bulk buyers have a lot of buying power - surely Gleeson's affordable price point negates the need for bulk deals.

"The group also hinted that it needed to take action to improve performance without providing any details of the action it will take."

At 0930 BST, the shares were down 3% at 388.20p.