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Bullish on property-related stocks

Bullish on property-related stocks

Economists such as AMP Capital?s Dr Shane Oliver now tip Australian economic growth to pick up to 3 per cent this year.

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By Tony Featherstone 10.03.2014

The housing story keeps improving. Capital-city auction clearance rates remain elevated despite doom and gloom about high-profile company closures and job losses. The 8.3 per cent surge in house approvals for January suggests faster housing construction than the market expected.

Economists such as AMP Capital’s Dr Shane Oliver now tip Australian economic growth to pick up to 3 per cent this year. I’m not as bullish, but concede my earlier view that interest rates will be cut again this year is on shaky ground. More likely is rates staying on hold for most of 2014, and the next move being up.

Judging by recent data, the economy is doing better than doomsayers predicted  – a long way from booming, but just as far from slipping into recession.

The neutral rates stance is good news for housing construction, and thus building-related stocks. The recently concluded interim reporting period further strengthened the case for property stocks, with several building companies or developers noting improving trading conditions.

Readers of this column know I have been bullish on property-related stocks since early last year. Record low interest rates had to drive up prices and spur greater housing demand. The recovery, slow and patchy at the start, is building good momentum.

Finding value in housing-related stocks is another issue. Several I’ve written about in the past year – notably Nearmap, Bank of Queensland, Nick Scali and Sunland Group – have rallied. As I wrote last week, it’s too soon to go cold on these stocks, although value is reducing as prices rally.

One strategy with cyclical stocks is looking at those left behind. Often it is for a good reason. Sometimes it is because new funds flow to the best-known names, and smaller players, which may have been more volatile, are overlooked.

West Australian property developer Finbar Group is an example. After falls in the first half of 2013, it rallied from a 52-week low of $1.12 to $1.64.

Finbar delivered record net profit of $18.9 million for first-half  FY13, up 34 per cent on the same period a year earlier. It announced a record cash position of $64 million and slightly increased the interim dividend. Return on equity (ROE) should rise in the next few years.

Value investors with a three-year view could find Finbar undervalued at current prices. It has not had anywhere near the attention of another column favourite, Cedar Woods Properties, which also has strong WA exposure. Finbar suits experienced investors who are risk tolerant.

Contract builder Tamawood has a lower profile among listed property developers. It designs and manages services in the home-contract construction market, and works in renewable energy certificates.

Tamawood announced a 32 per cent drop in revenue to $39.5 million for first-half  FY14, and a 55 per cent drop in net profit to $1.84 million, partly because of timing issues with government-affected work. The protracted Federal Government election hurt sales, said Tamawood.

More interesting was the company’s comment in its interim result: “In general, we are seeing trends that show signs of recovery in the housing market in 2014. The group is well placed to take advantage of the upturn in these market conditions and reaffirms its position that, subject to no adverse market conditions, the board believes the payment of a 21 cent fully franked dividend (total and interim) is still achievable for the 2014 financial year.”

This is important guidance. Tamawood’s reiteration that its full-year dividend guidance can be maintained suggests it is confident about its FY14 earnings.

As investors look backwards at Tamawood’s revenue and profit falls, savvy investors should look forward: if Tamawood can get those lost sales into this half-year and beyond, it could have a solid pipeline of work during a recovering housing market.

Tamawood’s rising ROE is a good sign, for such gains lead to higher company intrinsic value and eventually a rising share price. Its share issuance has been steady, cash flow is reasonable, and there is no debt on the balance sheet – all good signs.

Tamawood also looks better value than some developers that have rallied this year. It fell from a 52-week high of $3.58 to a 52-week low of $2.25 when the market learned the company would disappoint on first-half revenue growth, and has since recovered to $2.78.

Tamawood shares have been in an uptrend since early 2012, when it traded below $1.80. The recent price slump looks like an opportunity to buy into that rising, albeit volatile, trend.  

I emphasise that Tamawood, as a $73-million micro-cap property developer, is not for the risk-averse. At this stage, it suits speculators. Brokers barely cover the company and its website and announcements do not overwhelm investors with information. It is also fairly illiquid, with relatively low annual stock turnover.

Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 5, 2014.

 

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