The New Criterion: how the listed home builders are holding up

Tim Boreham

Independent Investment Research

The listed builders of detached dwellings are holding their own amid a stiffening housing downturn, with the ‘strength in adversity’ message emanating from their recent profit results.

Most of the listed builders reported improved profits and increased activity, the question being how they will fare if credit conditions continue to tighten and the currently robust employment trends weaken.

Whatever the case, they’re likely to fare better than the developers in the more speculative and more definitively oversupplied apartment sector.

The key bricks and mortar participants are the Singaporean controlled, AV Jennings (AVJ, 67c), the Victorian-centric Simonds Group (SIO, 41c), the Queensland oriented Villa World (VLW, $2.09) and the fellow banana-bending Tamawood (TWD, $4).

Simonds CEO Kelvin Ryan puts some context around the downturn. “It’s gone from breakneck crazy to very busy,” he says of the Victorian market.

In the context of the NSW market, AV Jennings is sipping from a glass half full. “Our view is this softening isn’t such a bad thing as it will lead to the market being more sustainable in the long run, both in terms of acquiring sites as well as our ability to produce and sell land and housing.” CEO Peter Summers says.

Traditional housing, he says, should remain supported by strong population growth and stable employment.

The companies’ results didn’t give too much inkling of looming issues, with profits if anything crimped by delays in development approvals  that have deferred revenue until the current year.

Simonds, the second biggest operator behind the unlisted Metricon, reported a 48 percent profit boost for the full year to $6.8m, with 2500 house starts relative to 2391 previously.

The 69 year old entity – which remains controlled by the Simonds family – is in repair mode given its insipid share performance since listing in 2014 at $1.78 apiece.

 In 2016 the inexorable share decline prompted patriarch Gary Simonds and the Roche family to mount a privatisation bid at 40c a share, but major shareholders snubbed the proposal.

Under CEO Ryan, who clocked in last March, the company has launched a multi-pronged improvement program that has included reducing debt and gaining better traction in its non-Victorian markets of NSW, Queensland and South Australia.

Simonds is also developing a “unique” financing product to convert the curious display home visitors into firm buyers. For the millennials – for whom sampling artisan beers in a boutique inner city brew house is a more attractive away to spend a Saturday afternoon – the company is honing other channels such as 3D modeling.

Ryan reckons that in the buoyant Victorian market developers got lazy and stalled on design innovation. “There really hasn’t been much technology change in the way houses are built,” he says. “We see a real opportunity with building techniques, especially green ones.”

For Simonds, it’s a case of ‘get bigger or get out’ and that means gaining traction in its non-Victorian markets. The company has been in the Queensland market for 15 years, but last year still only accounted for 255 starts out of 25,000 in the detached market (in Melbourne the company accounted for 2000 of an addressable market of 38,000).

Villa World chalked up 2017-18 earnings of $43.6m, within its guided range of $42-44m and 15 percent better than previously.

The company also sold 1678 lots, 39 per cent higher than the previous 1207.

If anything, Villa World’s current year guidance of $40m (10 percent lower) results from delays in key projects, including two in Melbourne. But management says the number is also assumes “general consumer confidence is maintained, interest rates remain low, credit conditions do not deteriorate and the first home buyers’ grant scheme remains intact.”

 Villa World says it is “well positioned with diversity in terms of our products and our markets with significant development properties now selling across major growth corridors in three states.”

Broker Baillieu Holst is more sanguine, trimming Villa World’s earnings forecasts by 15 percent between 2019 and 2012. “We believe that the slowing down of the credit approval process for home buyers and weakness in housing prices and demand may have had an impact,” the firm intones.

AV Jennings also cited “planning and production delays” on key projects for a 12 percent reported net profit decline to $45m, but in underlying terms earnings were flat.

In Victoria, laments Summers, the company has been slugging away in a strong market – albeit with some softening – but “hasn’t been able to get the value of work to a physical stage where it can be reflected in the accounts.”

This implies a pipeline of work that will support current year earnings.

Meanwhile, the Brisbane-based Tamawood attributed a 4.5 percent profit decline (to $8.69m) to factors unrelated to a housing downturn.

These include inclement weather and customer delays in receiving credit approvals, a side-effect of the banking royal commission.

Tamawood, which operates under the Dixon Homes brand, also cites a margin squeeze in the Sydney market because of delays between contracts being signed and the land being registered.

Tamawood acknowledges the market is slowing and is taking remedial action such as reviewing its house design and specifications. But once again, there’s no sniff of a bricks and mortar Armageddon.

While Simonds does not pay a divided, Tamawood, AV Jennings Villa World are yielding 6 percent, 7 percent and 9 percent (we stress that this is based on the 2017-18 earnings rather than current year expectations).

If the conventional rule book plays out, the discounted valuations are justified. But it’s also possible that a reversion to more sensible market conditions will coax timid first home buyers back into the market.

Of course the tempting yields become a dividend trap if the great Australian dream enters a nightmare phase.


Landmark White (LMW) 55c

Does a housing downturn bode well or poorly for the only pure-play property valuation firm listed on the ASX?

Conventional theory goes that if there are fewer property transactions there’s less need for valuation services. But then again if - or when - interest rates rise there’ll be more borrowers looking for better deals and more demand for bank valuations.

The same applies if things turn gnarly and bank foreclosures increase. Landmark White is taking no chances and is diversifying its business to government and insurance jobs. Landmark’s recent full-year numbers show its residential valuation work falling from 67 percent to 53 percent of revenues, but this is partly attributed to last year’s $23m cash/scrip acquisition of rival MVS National.

Landmark chief Chris Coonan reckons the measures adopted by the bank regulators (and the banks) themselves may already have done the trick and stabilised the Sydney and Melbourne residential markets.

“(The measures) are working and it is good,” he says. “The market was getting too high and if it didn’t happen we would have had some trouble in the future.

 “It’s hard to see a lot of mortgage stress given the (value) of properties has gone up considerably and overall the economy is looking quite strong.”

Landmark posted a $4.1m net profit – up 155 percent. There’s no sign of management waving the white flag, with current year guidance increased to earnings per share of 6.16c, 13 percent higher than last year’s 5.44c.

The company hasn’t missed a dividend in 19 halves, paying 4.6c (fully franked) in the 2017-18 year. Assuming a similar payout ratio, the company currently trades on a yield of 9 percent.

Landmark shares have steadily declined from 75c a year ago, bearing in mind the company raised $20.5m at 60c apiece to fund the MVS purchase.

This decline implies opportunity for investors convinced the property sector is in the mild and organised decline it had to have.


Tim Boreham authors The New Criterion


Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.



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Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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