(FRI $1.30) Buy

Finbar Group Ltd
AUSTRALIAN EQUITIES RESEARCH
(FRI $1.30) Buy
Analyst: Gavin Allen
Date: 19th February 2015
Finbar Group
Half Year Result
Price Target: $1.83/sh
Investment Case:
FRI has reported a first half result in line with our expectations at $11m NPAT. We
are looking for a stronger second half of $17m on the way to $28m full year, our
unchanged full year forecast. The ultimate result will be a function of sales rates on two
large projects at Toccata and Subi Stand. In 2016 and beyond the pipeline supports
a return to growth, with applicable presales robust to date. That said, sentiment is
weak and the media vocal in relation to potential supply, notwithstanding that not
all supply will get built. As a consequence FRI lacks obvious catalysts. In our view
however FRI, as low cost producer will retain market share through the cycle, and is
supported by a current 7% yield. Buy maintained.
Key Points:
•
FRI has reported a first half NPAT of $11m. We were looking for $10m and we
have no reason to amend our current full year NPAT forecast looking for $28m.
•
The ultimate result will be a function of sales rates on two large projects at Subi
Stand and Toccata. These projects will see construction complete in the next
few months after which sales activity will recommence in earnest.
•
In the meantime sales activity in off the plan product, which will impact 2016
and 2017, has been robust, and FRI now has pre-sales contracts worth $428m, a
healthy position.
•
The business has cash of $49m with a further $20m to come after settlement of
the Gateway building in Victoria Park in March 2015.
•
As a consequence of the sale of this building our forecast rental income for 2016
decreases and our forecasts for 2016 reduce from $33.9m to $30.9m. The balance
sheet improves however by the $20m in cash realised and FRI can generate a
return on this capital in future years beyond the income lost.
•
In 2016, we see resumed growth off a lower base as remaining Toccata and Subi
Strand product is settled together with new projects i) Norwood, ii) Springs
Arbor North, iii) Unison in Maylands and iiii) Linq in Northbridge.
•
As always, FRI is subject to construction and settlement timetables which may
impact earnings half over half and even year over year, and this may well be a
feature of 2015 and 2016.
•
That said, notwithstanding some recent negative press and speculation around
apartment supply and a cooling WA economy, we continue to believe:
1. Perth is fundamentally under supplied in terms of apartment choice
compared to many other cities of similar size,
•
2.
Not all the current supply on offer “off the plan” will get built,
3.
Apartment living will become an increasingly accepted housing alternative
in Perth as the city continues to grow and
4.
As low cost producer with proven delivery capability, FRI is well placed to
maintain its healthy market share.
Year end 30 June
Share Price
1.30 A$/sh
Price Target (PER)
1.83 A$/sh
Valuation (DCF)
1.83 A$/sh
WACC10.6%
Terminal Growth
2.0%
Shares on issue
228.4 m, diluted
Market Capitalisation
296.9 A$m
Enterprise Value
314.4 A$m
Debt (June 2014)
78.4 A$m
Cash (June 2014)
61.0 A$m
Key Financials
2014a
2015f 2016f
Revenue (A$m)
273.1
184.9 214.8
EBITDA (A$m)
59.1
40.1
44.2
EBIT (A$m)
58.9
40.0
44.1
Reported NPAT (A$m)
36.5
28.0
30.9
Normalised NPAT (A$m)
37.6
28.0
30.9
Gross Cashflow (A$m)
41.7
27.7
31.0
Capex (A$m)
2.2
-0.5
-0.5
Op. Free Cashflow (A$m)
99.6
-40.8
1.3
Revenue Growth (%)
111%
-33%
19%
EBITDA Growth (%)
37%
-32%
10%
Norm. NPAT Growth (%)
28%
-25%
10%
Normalised EPS (Ac)
17.01
12.28 13.52
Norm. EPS growth (%)
25%
-28%
10%
PER (x)
7.6
10.6
9.6
EV:EBITDA (x)
5.3
7.8
7.1
EV:EBIT (x)
5.3
7.9
7.1
DPS (Ac)
10.00
10.00 10.00
Dividend Yield (%)
7.7%
7.7%
7.7%
Net Cash (A$m)
-17.5
-22.0
-34.5
Net Debt:Equity (%)
7%
9%
13%
Interest Cover (x)
294.6
na
na
Share Price Chart
$/sh
$1.90
FRI 12 Month Price History
$1.60
$1.30
$1.00
Feb-14
May-14
Aug-14
Nov-14
Disclosure
From time to time Euroz may act as the buy-back broker
with respect to an on-market buy-back that is being
conducted by the company that is the subject of this
research report. During the period when such a buy-back
is being conducted, if you wish to sell and speak to your
Euroz adviser about this issue, you will be informed that
that Euroz is acting for the company that is undertaking
the buy-back and that your adviser is therefore unable to
give you advice in respect of the proposed sale.
In the meantime the stock yields 7% fully franked. Buy maintained.
WA Industrials Book - March 2015
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any
account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document.
Finbar Group Ltd
AUSTRALIAN EQUITIES RESEARCH
(FRI $1.30) Buy
Analyst: Gavin Allen
Analysis:
We provide below our analysis of the pipeline of projects available to FRI.
Fri share of revenues
Construction commenced/complete
2014
2015
2016
2017
2018
($m)
($m)
($m)
($m)
($m)
31
-
-
-
-
Pelago West
3
4
4
5
-
Knightsgate
9
-
-
-
-
St Marks
79
-
-
-
-
AU
46
3
-
-
-
Ecco
27
3
-
-
-
The Springs
-
50
-
-
-
Pelago East
62
3
10
18
25
Mill Point Road
2
7
-
-
-
Subiaco
-
65
18
-
-
Toccata
-
40
13
-
-
Norwood
-
-
18
-
-
Concerto and Harmony
-
-
-
84
20
Maylands
-
-
42
23
23
The Springs (Arbor North)
-
-
39
-
-
Dianella
-
-
-
-
34
The Springs (South and 1014)
-
-
-
27
38
West Perth
-
-
-
-
63
Northbridge (James street)
-
-
65
-
-
West Leederville
-
-
-
43
-
South Perth (96 Mill Pt road)
-
-
-
50
-
South Perth Civic Triangle
-
-
-
-
150
Belmont (GE Highway)
-
-
-
30
-
63 Adelaide Terrace
-
-
-
-
38
257
174
208
278
388
Adagio
Construction not yet commenced
Revenue forecast
Revenues per the above will not equate to reported revenues due to equity accounted
developments. This does not impact our view of reported profits
We note:
•
We see reduced earnings in 2015 a consequence of our conservative sales
assumptions on the Subiaco and Toccata projects.
•
We see further growth in 2016 as three new projects, i) Norwood, ii) the Springs
Arbor North, iii) the Linq project in Northbridge and iiii) Unison project in
Maylands complete and settle. Presales on these projects have been steady and
construction on all three have commenced or will do so shortly.
•
In 2017 the massive Concerto project (currently under construction) completes
and in general the pipeline of available opportunities is robust and growing.
WA Industrials Book - March 2015
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any
account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document.
Finbar Group Ltd
AUSTRALIAN EQUITIES RESEARCH
(FRI $1.30) Buy
Analyst: Gavin Allen
Headwinds
•
It is clear the number of new apartment buildings available for investors to
consider has increased.
•
Whether these opportunities are ultimately built is a function of achieving the
necessary presales to enable the project to be banked.
•
In addition, as the mining boom unwinds, rent rates are decreasing and this may
impact investor appetite.
•
Finally, the media is talking up all of the above which does not help sentiment
generally.
Mitigation
•
We continue to believe that the market will sensibly address the supply and
demand equation, as the nature of presales required to finance a project acts as
a supply brake of sorts over the medium term.
•
This is not to suggest short term peaks in supply may not occur from time to time,
particularly if a number of marginal projects scape over the presales threshold
at the same time potentially resulting in an excess of supply upon completion.
•
When this happens new supply doesn’t receive presales, the excess supply is
eventually cleaned out, and the cycle resumes.
Long term
•
Finbar continues to be one of the low cost producers in the WA market with a
proven track record of delivery.
•
We also continue to believe Finbar product will see a sustained share of the
available demand, demand we believe will increase over the medium to long
term as WA residents look for alternative living arrangements in a sprawling city.
The case precedent for this in other growing cities in clear.
•
Short term demand will likely moderate as rents reduce and investors potentially
slow however ultimately we see a city continuing to grow over time that is
fundamentally underserviced in terms of apartment living.
Investment Thesis
•
Investment sentiment as it pertains to WA is clearly poor as the mining
construction cycle ends and low commodities prices create job and economic
uncertainty.
•
Finbar is not immune from this and we see no immediate catalysts, particularly
as, Finbar has been unable to be definitive in terms of 2015 earnings with the half
year result. This is because timing on the sale of remaining product at Subiaco
and Toccata is unknown.
•
That said, we see pipeline the of opportunity as sufficiently robust to maintain
and ultimately increase the dividend even as earnings fluctuate somewhat with
timing of projects and FRI currently yields 7.7% fully franked.
•
We see this as a floor, and while catalysts are skinny and consequently FRI may do
some further time over the next 6 months at current levels, we continue to like
the business, its track record and management.
•
In the meantime the stock trades at 10.6x our reduced 2015 forecasts, hardly
demanding.
•
We maintain our Buy recommendation with a long term view, despite some
potential short term earnings fluidity.
WA Industrials Book - March 2015
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any
account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document.
Finbar Group Ltd
AUSTRALIAN EQUITIES RESEARCH
(FRI $1.30) Buy
FINANCIAL STATEMENTS
Analyst: Gavin Allen
YEAR END 30 JUNE
PERFORMANCE RATIOS
13A14A15F16F17F
Income Statement
13A14A15F16F17F
Sales
124.2261.9174.3207.8278.1
Other 16.011.210.6 7.0 7.0
Revenue
140.2273.1184.9214.8285.1
Operating costs
-97.0-214.0-144.7-170.6-227.7
EBITDA
43.259.140.144.257.4
Depreciation
-0.2-0.1-0.1-0.1-0.1
Other non cash
0.00.00.00.00.0
EBIT 43.058.940.044.157.2
Net Interest income/(expense) 0.2-0.20.00.00.0
Associates
1.30.00.00.00.0
Other income/(expense)
0.00.00.00.00.0
Abnormal items (pretax)
0.00.00.00.00.0
EBT
44.558.740.144.157.2
Tax expense
-13.0-17.9-12.0-13.2-17.2
Discontinued operations
0.00.00.00.00.0
Minority interest
-0.3-4.30.00.00.0
Reported Earnings
31.236.528.030.940.1
Dividends
-13.1-13.2-13.7-13.7 0.0
Adjustments (one off )
0.00.00.00.00.0
Retained earnings
18.123.314.317.240.1
Net Profit (ex valuation)
29.337.628.030.940.1
Growth & Margins
Revenue Growth
EBITDA Growth
EBIT Growth
Normalized Net Profit Growth
EBITDA margin
EBIT margin
Normalized net profit margin
Effective tax rate
Cash flow (A$m)
Returns
Return on avg capital employed (%) 21%
25%
16%
16%
19%
WACC (%)
Return on assets (%)
12%16%16%15%14%
Return on average equity (%)
16%
16%
11%
12%
14%
13A14A15F16F17F
Pretax Profit
44.558.740.144.157.2
+ Depreciation
0.20.10.10.10.1
- Tax Paid
-7.4-17.6-12.0-13.2-17.2
+ inc (- dec) in provisions
0.0
0.5
-0.5
0.0
0.0
- Profit/+ loss on disposal
0.0
0.0
0.0
0.0
0.0
+/- Other
0.00.00.00.00.0
Gross Cashflow
37.341.727.731.040.2
- Capital expenditure
0.3 2.2-0.5-0.5-0.5
+/- Changes in working capital
-32.9
55.7
-68.0
-29.3
27.4
Operating Free Cashflow
4.7
99.6 -40.8
1.3
67.1
+/- Investments
0.00.00.00.00.0
- Dividends
-17.9-16.4-13.7-13.7 0.0
+ Proceeds from equity raised
0.0
8.4
0.0
0.0
0.0
+/- (Acquisition) Disposals
0.00.0
50.00.00.0
+/- Minority interests
0.00.00.00.00.0
+/- Other
-5.4-5.20.00.00.0
Net cashflow
-18.686.4 -4.5-12.467.1
Cash at beginning of period
-85.3 -103.9
-17.5
-22.0
-34.5
Net debt at end of period
-103.9
-17.5
-22.0
-34.5
32.7
Balance Sheet ($m)
13A14A15F16F17F
Cash
35.6
60.9
66.4
53.9 121.1
Receivables
24.3
11.13.23.85.1
Inventories
180.0 75.8114.4131.2116.8
Other
0.70.40.40.40.4
Current Assets
240.6148.2184.4189.4243.4
Receivables
12.046.113.315.921.3
Inventories
4.211.889.9
103.191.8
Property/Plant/Equipment
14.712.412.713.113.5
Equity Accounted Investments 1.10.00.00.00.0
Investment Property
122.1
135.085.085.085.0
Deferred tax assets
2.41.91.91.91.9
Other
0.00.00.00.00.0
Non Current Assets
156.5207.2202.9219.0213.4
Total Assets
397.1355.4387.3408.4456.8
Payables
-33.4-12.0-20.1-24.0-32.4
Interest bearing liabilities
-43.7 0.0-10.0-10.0-10.0
Current tax payable
-9.0-13.5-13.5-13.5-13.5
Provisions
0.0-0.50.00.00.0
Current Liabilities
-86.1-26.0-43.6-47.5-55.9
Payables
0.00.00.00.00.0
Interest bearing liabilities
-95.8-78.4-78.4-78.4-78.4
Tax liabilties
-9.2-11.8-11.8-11.8-11.8
Provisions
-0.1-0.5-0.5-0.5-0.5
Non Current Liabilities
-105.1-90.7-90.7-90.7-90.7
Total Liabilities
-191.2-116.7-134.3-138.2-146.6
Net Assets
206.0238.7253.0270.2310.2
Contributed equity
137.8151.7151.7151.7151.7
Reserves
1.41.41.41.41.4
Retained profits
63.6 78.2 92.5109.7149.8
Minority Interests
3.17.47.47.47.4
Total equity
205.9238.7253.0270.2310.3
34% 111%
-33%
19%
34%
13%37%-32%10%30%
13%37%-32%10%30%
45.3% 28.0% -25.4% 10.1% 29.7%
30.8%21.6%21.7%20.6%20.1%
30.7%21.6%21.6%20.5%20.1%
20.9%13.8%15.2%14.4%14.1%
29%30%30%30%30%
Liquidity
Capex/depreciation (x)
Current ratio (x)
Quick ratio (x)
Receivable days
Payable days
2.85.74.24.04.4
1.86.03.52.43.9
3139211219
613 61018
Risk Measures
Dividend Cover (x)
Payout ratio (%)
Net interest cover (x)
Net debt/equity (%)
n/an/an/an/an/a
66%60%81%74% 0%
na 294.6
na
na
na
50%
7%
9%
13% net cash
SHARE DATA/VALUATION
13A14A15F16F17F
Share Data
Issued shares (m)
Weighted ave shares (m)
Fully diluted shares (m)
Basic EPS (A$)
YoY change (%)
Fully diluted EPS (A$)
YoY change (%)
Fully diluted normalised EPS (A$)
YoY change (%)
Dividend/share (A$)
Franking (%)
Gross cashflow/share (A$)
NBV/share (A$)
NTA/Share (A$)
218.2220.8228.4228.4228.4
216.0220.8228.4228.4228.4
216.0220.8228.4228.4228.4
0.140.170.120.140.18
10%14%-26%10%30%
0.140.170.120.140.18
44%25%-28%10%30%
0.136
0.17
0.12
0.14
0.18
44%25%-28%10%30%
0.0950.1000.1000.1000.000
100%100%100%100%100%
0.170.190.120.140.18
0.941.081.111.181.36
0.941.081.111.181.36
Valuation
PER (Basic) (x)
9.07.9
10.69.67.4
PER (Fully diluted) (x)
9.6
7.6
10.6
9.6
7.4
PER (Fully diluted, normalized) (x)
9.6
7.6
10.6
9.6
7.4
P/CFPS (x)
7.56.9
10.79.67.4
Price/NBV (x)
1.41.21.21.11.0
Price/NTA (x)
1.41.21.21.11.0
Dividend Yield (%)
7.3%7.7%7.7%7.7%0.0%
Fully dil normalized 3 yr EPS Cagr (%) n/a
n/a
n/a
n/a
n/a
PEG ratio (x)
n/an/an/an/an/a
EV
400.8 314.4 308.9 321.4 254.3
EV/EBITDA (x)
7.35.37.87.15.5
EV/EBIT (x)
7.35.37.97.15.5
EV/Revenue (x)
2.21.21.71.51.1
OTHER INFORMATION
12-mth High/Low (A$/sh)
Average daily volume (A$m)
ASX Code
Next result
$1.80/$1.28
0.2
FRI
Aug 2015
COMPANY DESCRIPTION
FRI is a WA based property developer
WA Industrials Book - March 2015
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any
account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document.
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AUSTRALIAN EQUITIES RESEARCH
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