A recurring column theme this year has been to buy property-related stocks. I started by identifying property-information stocks in early 2013, then furniture stocks, and financiers such as second-tier banks with strong leverage to residential property. Now it’s time to look closer at stgelopers.
This column identified Sunland Group earlier this year for its exposure to a recovering South-East Queensland property market. This week, we add two property stgelopers to the watch-list: Cedar Woods Properties Group and Finbar Group, both of which have high West Australia exposure.
Property stgelopers such as AV Jennings, Peet and Devine were also examined for this column, but the best value was found in the impressive Cedar Woods and, to a lesser extent, Finbar Group, which could surprise in the next few years despite the slowing resource investment boom.
Finding value in cyclical stocks – and in the sharemarket generally – is not easy. Many construction-related stocks have rallied this year in anticipation of stronger housing-construction activity, thanks to historic low interest rates and improving consumer and business confidence.
Several retail stocks have also rallied, amid expectations of stronger retail sales in 2014. Better-than-expected sales growth figures this month show the optimism was well placed, but as in the housing sector, valuations generally look stretched.
Cedar Woods has rallied from a 52-week low of $4.16 to as high as $7.62, before easing to $6.72. The stock’s one-year total shareholder return (including dividend reinvestment) is 62 per cent. Over three years, the average annualised total return is 31 per cent.
Even after delivering impressive gains, Cedar Woods is still reasonably priced. Its strategy is to build residential communities in high-growth corridors with decent public-transport infrastructure, and it has a portfolio of 13 community and apartment projects in West Australia and Victoria.
Cedar reported record after-tax profit of $36.3 million for FY13, compared with $34.3 million a year earlier on flat revenue – a good result in a competitive market for property stgelopers.
In late October, Cedar announced a strong first-quarter trading update: settlements to date and property pre-sales were already above 70 per cent of the FY2014 budget and it gave guidance for after-tax net profit of about $40 million for FY14, or about 10 per cent up on last year.
Cedar’s main attraction is its ability to grow profits in good and bad property markets. It increased earnings per share (EPS) from 16.2 cents in FY09 to 53.2 cents in FY12. EPS of 49.9 cents in FY13 was due to the lift in issued shares from a May 2012 capital raising.
Net profit after tax has grown from $9.3 million FY09 to $36.3 million in FY13, with five consecutive yearly increases. Revenue, too, has risen for five consecutive years to $172.8 million. Dividends per share have raced from 7 cents in FY09 to 26 cents in FY13.
Earnings growth consistency is an especially strong trait for cyclical companies highly leveraged to the state of the economy. That Cedar could grow sales and profits during the aftermath of the 2008 Global Financial Crisis, which hurt many property stgelopers, is an excellent sign.
Cedar has consistently picked strong locations. It has projects in seven of Australia’s 10 fast-growing city areas, including Wyndham and Whittlesea in Victoria, and Serpentine-Jarrahdale, Armadale, Kwinana, Wanneroo and Rockingham in WA, according to a recent presentation.
Cedar has a good mix of projects at differing stages of stgelopment in WA and Victoria. Low debt and strong cash flow should help it widen into the Queensland property market in coming years, further expanding its project pipeline and diversifying geographic earnings.
In contrast, Finbar Group mostly focuses on inner-city, high-rise apartment complexes in Perth. It has rallied from a 52-week low of $1.04 to as high as $1.70, before retreating to $1.58. Its five-year average annualised total return (including dividend reinvestment) is 36 per cent.
Like Cedar, Finbar has been well managed and has a good long-term record. Wilson HTM had a hold recommendation on Finbar in July, but added: “We currently apply a degree of caution in assessing the outlook as Western Australia’s resource stgelopment boom peaks. We would look to upgrade to a buy on evidence of a WA “soft landing” or if Finbar is able to demonstrate that projects such as its recently launched Spring View Towers are not seeing a material sales slowdown or price discounting.”
Finbar reported a record after-tax net profit of $31.2 million for FY13, up 10 per cent on the previous year – its seventh consecutive year of profit growth. It expected the FY14 result to be similar to FY13, with “potential for further growth”.
The Real Estate Institute of Western Australian said there was a 9 per cent lift in sales activity in WA in October, with central Perth property especially strong. Although the resource investment boom is slowing, claims that the WA property market would have a “hard landing” have been overstated.
With the official cash rate likely to remain at a record low of 2.5 per cent for much of next year, Finbar and Cedar Woods look set for another solid year. Or perhaps better than that, if low interest rates and a stabilising resource sector give the WA property another boost.
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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 November 7, 2013.