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By George Whitehouse, StockVal Investment Analyst

Fleetwood (ASX:FWD) commenced business in 1964 with its operations being based around the sale of caravans and caravan accessories. Fleetwood Corporation listed on the Australian Stock Exchange in 1987, at which time the group activities had been expanded to include the operation of caravan parks and the manufacture of park homes.

The activities of FWD today are focused around three of Australia’s growing sectors – Recreation, Retirement and Resources.

Divisions

The company has two key divisions, recreational vehicles and manufactured accommodation.

FWD has a 20-25% market share for the construction of caravans in Australia. Competition in the recreational vehicle market centers on price, features and quality of products. A brand segmentation strategy targets customers who place emphasis on different features.

Competitive advantages stem from an ability to provide a variety of recreational vehicles that meet different needs and budgets with different brand offerings.

FWD has a number of brands that service the recreational vehicle market:

The Camec Group, established in 1962 is the largest caravan spare parts, accessories and marine equipment manufacturer, wholesaler and retailer in Australasia. It is headquartered in Melbourne with branches in Sydney, Brisbane, Perth and Auckland. 

Coromal Caravans, established in 1977 manufactures a range of products including Camper trailers, Pop-top caravans and full size Caravans. Coromal is Western Australia’s largest caravan manufacturer and one of the largest in Australia.

Windsor Caravans, is the fourth largest caravan manufacturer in Australia and is headquartered in Melbourne. Its Campers, Poptops and Caravans are distributed nationally through the dealer network.

Flexiglass Challenge, established in 1949 manufactures fibreglass ute canopies, liners & lids. It is headquartered in Perth with branches, dealers and agents across Australia and New Zealand.


 
The manufactured accommodation division is one of the largest park home, transportable home and portable accommodation builders in Australia. The business also provides accommodation to the retirement and resource industries for rental or lease back income. It is headquartered in Perth with operations in Melbourne, Adelaide, Darwin, Karratha and Alice Springs.

A key asset is the Searipple mining accommodation village in Karratha, WA. Fleetwood built, own, rent out and operate the facility which can house up to 1500 people. It is currently running at full capacity. It is located close to major mining and energy projects. FWD collects rental income from the village and it enjoys strong margins.

A slowdown in the resources sector in WA would reduce demand for manufactured accommodation and is a key risk to the business. However, the current outlook is very strong with massive growth in iron ore exports and a strong investment in long term LNG export facilities.

Indeed, there is a large pipeline of resources projects in Western Australia expected to come on stream in the next 5 years or so. This should benefit FWDs manufactured accommodation business and provide further growth opportunities for Searipple Village. Recently the business announced it has secured a project for the Western Australia state government to supply accommodation for construction personnel engaged in the Ord-East Kimberley Expansion Project. FWD will supply at least 152 rooms, potentially 318 rooms and operate the facility for a minimum of 18 months. 

Management has recently indicated significant tendering activity indicating a pick up in the resources sector.

Outlook

FWD has cyclical business characteristics with a degree of fixed cost leverage. Growth is partly determined by factors it cannot control, such as resource industry activity, petrol prices, investment market volatility that keep people from retiring, increasing unemployment and economic uncertainty.

The 2009 financial year highlighted the cyclical nature of the FWD divisions. The recreational vehicles division saw EBIT fall from $19.5m in 2008 to $8.3m in 2009 while the manufactured accommodation division increased EBIT from $33m in 2008 to $45.4m in 2009. The overall result was a small increase in net profit for the year.    

From a thematic view point FWD has good potential to benefit from growth in the resources and retirement sectors over time. In the short term the outlook from resources is most positive whilst the retirement sector is a longer term growth opportunity.

An aging population provides favorable demographics and opportunities to increase sales in a growing industry for recreational vehicles. An estimated 70% of new caravans are purchased by consumers over the age of 55, this demographic is expected to represent 30% of the population by 2020. The recent financial crisis dented the wealth of many nearing retirement and petrol prices while relatively low today impact demand. The longer term demographics are favorable for this segment.

Budget tightening from retirees is hurting the recreational vehicle division however commentary from management in the 2010 half year report indicates FWD’s order book is strengthening and the company is steadily increasing production in anticipation of further strength in this market.

The market capitalization of FWD is around $480m, current directors own approximately $87m of shares. Management has significant experience and interests aligned with shareholders.

Valuation

FWD displays the attributes of a good business and has provided shareholders with a wonderful total return of 30.4% p.a. over the last decade, significantly higher than the 8.8% p.a. achieved by the All Ordinaries Accumulation index. As value investors these is the type of business we spend our days trying to target.
 
The business has achieved sound profit growth over time with net profits increasing from $3.71m in 1999 to $35.61m in 2009. Net profit is well supported by operating cash flow.

Profitability has been good with a normalized return on equity, including franking, to the owners of over 30% during the review period.

Over the period of 2005-2009 the business declared profits of $143.3m, paid fully franked dividends of $142.1m and raised $45.8m of new equity by way of the dividend re-investment program and executive options.   
 

While management has paid out a large part of net profit as dividends they have been able to achieve good returns on incremental equity, compounding the new equity at around 30%, certainly better than an investor could get in a bank account.

Management has used little debt in the past and today has no debt. It is appropriate this business have low gearing given its earnings are cyclical.

Using analyst’s estimates of profits, dividends and equity for the next few years we estimate the future profitability of FWD.

We have selected a NROE of 34.5% as the Adopted Performance Forecast (APF) and using the  Distributions (D) and Reinvested (RI) over the recent past and the forecast period we now have the key inputs StockVal requires to value FWD Corporation,

Using the above inputs and the equity per share StockVal produces the following values,

The above valuations are based on analysts’ forecasts and are subject to change without notice.

An ageing population, increasing mining activity, no gearing and good profitability put FWD in a strong position. Investors need to ask themselves the question. Will the next 10 years be similar to the past 10 years? If you believe it will, Fleetwood is one business that should be in your watchlist.

Fleetwood has demonstrated a high return on equity, is run by honest and capable management however unfortunately with a current share price around $9 unfortunately this business is not cheap. A sensible investor would also require a margin of safety in the price they pay.

Clime Asset Management and StockVal are part of Clime Investment Management (ASX:CIW). StockVal is Australia’s premier online share valuation service. For a two-week free StockVal trial, Click here.

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