Those who follow this column know it has been bullish on companies exposed to established and new residential housing construction. With record-low interest rates, demand for housing would rise, boosting companies that sell materials, make homes, and provide finance.
The housing sector has cooled slightly this year from a strong base. But the outlook remains positive, with interest rates expected to remain on hold this year and probably well into 2015. The risks are on the upside, with housing potentially doing better than the market expects.
Westpac chief economist Bill Evans recently wrote: “We expect that the growth profile for Australia will gather considerably more pace than is expected by the Reserve Bank and, arguably, the yield curve. Accordingly, we continue to expect the next move in rates will be a tightening but not until the second half of 2015, with August currently pencilled in for the date of the first move.” If Evans is right, the housing sector has plenty of growth ahead.
This favourable outlook prompted this column to identify a range of housing-related stocks, and regional banks, such as the Bank of Queensland (BOQ) and the Bendigo and Adelaide Bank. BOQ was among this column’s stronger ideas and I favoured bank stocks generally,
I wrote in August 2013 for The Bull: “BOQ has rallied since mid-2012 and has a long way to go to get back to previous peaks above $12 after a period of underperformance. I like how management is turning around the underperforming BOQ and helping it realise its potential and great brand. Some big headwinds – notably a sharp increase in bad debts in 2012 thanks to a weak economy, rising unemployment, and sluggish property prices – could become tailwinds.”
BOQ had rallied from $9 in August 2013 to $12.60. Its one-year total shareholder return (including dividends) is 40 per cent, according to Morningstar. But after stellar price gains, it is time to take profits in BOQ and reinvest outside the bank sector.
Chart 1: Bank of Queensland
BOQ surprised the market this month with news that its CEO, Stuart Grimshaw, was resigning and leaving at month’s end, to work in the United States. Grimshaw led BOQ for about two-and-a-half years, engineered its recovery, and appeared to be well rated by the market, judging by analyst reports.
I don’t like surprise CEO resignations. The board should manage the succession process, flag executive renewal well in advance, and oversee the process in an orderly fashion – not have a resignation thrust on them, as appears to be the case with Grimshaw.
The risk is that BOQ loses focuses as it searches for a new CEO, which is a shame given its strong FY14 result and good trading momentum. The bank might manage the transition seamlessly, but having soared from its mid-2012 lows, it’s too big a risk at current prices.
Bendigo and Adelaide Bank is a more interesting proposition. I covered Bendigo for The Bull in November, 2013: “Bendigo has an excellent brand and high customer ratings, but suffers from a smaller customer base and higher funding costs. Still, Bendigo has a relatively low-risk business model, a well-diversified revenue base, and a good long-term record.”
It has since rallied from $10.80 to $12.42 and a one-year total shareholder return of 31 per cent (including dividends). Its FY14 result impressed. A headline cash profit of $382 million beat market expectations, bad and doubtful debts were lower than expected, margins improved, and the balance sheet was strengthened. Bendigo’s solid momentum should carry over into FY15.
Chart 2: Bendigo and Adelaide Bank
Long term, Bendigo has scope to grow through acquisitions, and should benefit from continued growth in housing and competition in the banking sector.
Macquarie Equities Research wrote after the result: “Longer term, BEN continues to be well placed to benefit from the potential “levelling of the playing field” in capital, as well as industry consolidation, which has been helped by BEN’s improving share-price currency and more realistic seller expectations.”
Macquarie has a 12-month price target of $13.18 for Bendigo. The expected dividend yield, fully franked, for FY15 is just over 5 per cent, according to consensus analyst forecasts. That implies a decent double-digit total shareholder return from Bendigo in FY15, and it looks reasonably valued on a forecast Price Earnings (PE) multiple of 12 times, on consensus estimates.
I doubt Bendigo will provide the same return in FY15 as it did in FY14, but it’s too soon to take profits.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply 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 August 27, 2014.
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