The outcry of COVID-19 urged regulatory bodies across the globe to bring accommodative financial policies to steer the economy and to spur spending by businesses and households. The Reserve Bank of Australia (RBA) slashed the cash rate to a historical low of 0.10% in November 2020. The RBA expressed its intention not to increase the cash rate at least for the next 3 years as per the policy meet on December 1, 2020. The record-low interest rates and increased demand for single-family detached properties helped revive the housing market.
The Australian housing market is showing recovery with approvals for private sector buildings reaching the highest level since February 2000. The private sector buildings approvals have been increasing for the last four months. According to the data released by the Australia Bureau of Statistics, approvals for total dwellings increased by 3.8% in October 2020 over the previous month. Approvals for private residential buildings increased by 3.1% over the preceding month. Approvals for private non-residential dwellings like offices, malls, retail stores witnessed an increase of 6.2%.
Figure 1. Dwelling Units Approvals Showing Revival
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
Due to social distancing and stay-at-home protocols, households spent on home renovations and improvements reflected an increase in September 2020 quarter. Demand for single-family detached housing increased following the easing restrictions. This was in contrary to private businesses, where capex spent on building structures deteriorated in September quarter because of weak sentiments and store closure/ travel restrictions.
Figure 2. Faster Recovery of Residential Buildings Approvals Aided by JobsKeeper Program and Homebuilder Scheme
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
Increase in inventory supply and weak buying sentiments affected the market. Households prioritised essentials over discretionary spend whereas construction activity is yet to show the recovery. Data released by ABS showed the value of construction work done declined in the last two quarters. In addition, the weighted average price of residential dwellings in eight capital cities represented by the Residential Property Index declined by 1.8% in September 2020 quarter.
Figure 3. The Mean Price of Residential Dwellings Contracted Following Increase in Inventory and Weak Buying Sentiments
Source: Australia Bureau of Statistics, Chart Created by Kalkine Group
All cities have shown a drop in residential property prices with the exception of Canberra. New South Wales and Victoria showed notable correction in the mean prices of residential dwellings in June 2020 quarter (QoQ basis). A surge in cases following stage 4 restrictions affected the Victoria housing market. On dwelling approvals, five states reported an increase in dwellings approval in October 2020 over the last month whereas Victoria continued to decline. New South Wales and Western Australia showed strong recovery.
Figure 4. Mean Residential Dwelling Unit Price at Victoria was Affected by Stage 4 Restrictions
Record low interest rates saw an increase in loan offtake for housing. Home loan commitments surged for both new homes and existing homes. New loan commitment has increased by 0.7% in October, while the value of new owner-occupier home loan commitments rose by 0.8% in the same period. The data also showed increased participation from first-time buyers for both construction and new home loan. The HomeBuilder program provided a grant of $25,000 to build or renovate homes. This lifted the construction as well as new home loan offtake by first-time buyers. The program has extended until March 2021 to improve the housing market.
Key Risks: The housing market is highly sensitive to economic developments. The pandemic increased the unsold units and reduced the home prices in residential dwellings in the majority of states. Businesses spent less capex on buildings and structures. With expiration of stimulus packages and fall in mean prices of residential dwellings, households may defer home purchases. With an increase in labour costs at the private sector and a high unemployment rate, wage hikes are unlikely to lift the buying sentiments immediately.
Approvals for private residential dwellings have been trending upwards for the past four months. Approvals for total dwelling units increased by 3.8% in October 2020 over last month. With these developments, we have figured out 4 stocks on ASX that might see momentum on the face of an increase in housing approvals and subsequent likely impact on the construction activity.
1. GDI Property Group Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 623.33 Million, Annual Dividend Yield: 6.73%)
Strong Positioning in Perth: GDI Property Group Ltd. (ASX: GDI) operates as a property and funds management company. The company owns five rental properties in central business districts of Australia. Through Funds Management business, GDI manage about seven unlisted investment schemes with combined AUM of $504.7 million as of June 2020. The company had property portfolio covering Western Australia, New South Wales and Queensland. Property revenues declined owing to departure of UGL Limited on the back of lease expiry in January 2020. The pandemic affected rental collections. In addition, occupancy rate reduced from 84.9% in FY19 to 81.1% mainly in 5 Mill Street. Total revenues declined by 9.6% in FY20 over last year. Its EBITDA margin dropped to 62.4% owing to lower rentals and fees, and increase in acquisition expenses related to property in Perth. GDI realized fair value gain on investment property to the tune of $32.8 million in FY20, which had boosted net profit although it stood lower than last year. It had reported operating cash flows of $46.2 million in FY20, down from $51.2 million in last year. GDI reported cash balance of $10.1 million with nil nearing debt maturities. Debt level looks modest, the company’s loan-to-value ratio at 15.6% is below 40% approved by the Board. It had increased borrowings under its principal facility to $210 million, of which $137.8 million was drawn and $72.2 million left unused. GDI also extended the term to July 2022.
Outlook: GDI is aligning its portfolio in Perth with about 87% of its owned properties and 83% of AUM now located in Perth. Management is expecting supply shortages for prime grade buildings in Perth. Although Perth had the highest vacancy rate of 18.4%, it had more secondary grade buildings and not the primary grade buildings that GDI owns. As a sizeable portion of leases getting expired in FY21, management is expecting a moderation in fund flows.
With sizeable portfolio in Perth, management intends to deepen its exposure to benefit from a low supply of primary grade buildings. As per the data released by the Australia Bureau of Statistics, Western Australia witnessed a significant increase in dwelling units approvals in October 2020 over the last month. With sizeable portfolio, GDI Property Group is strongly positioned to benefit from the likely increase in construction activity in Western Australia.
Valuation Methodology: Price/Earings Multiple Based Relative Valuation (Illustrative)
Price/Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs GDI (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock yielded one-month returns of +4.15%. The company is aligning its focus in Perth. With adequate portfolio in prime grade buildings and rising vacancy rates at Perth, GDI is well-positioned to benefit from the increased dwelling units approvals at Western Australia as showed by Australia Bureau of Statistics. The stock performed ahead of the market volatility index. It offers high dividend yield of 6.73% (annualized basis) as the company manages funds invested in property assets. We have valued the stock using the Price/Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.130, down 1.74% on 7th December 2020.
2. Vicinity Centres (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 7.82 Billion, Annual Dividend Yield: 9.09%)
Strong Liquidity Supporting Expansion: Vicinity Centres (ASX: VCX) is a property management company with 64 retail assets under management with combined value of $23.6 billion as of June 2020. The company operates retail assets in Sydney, Melbourne, Brisbane, Perth and Adelaide. Revenue dropped by 5.45% in FY20 over prior year mainly due to lockdown restrictions and store closures. The company experienced lower occupancy rate and drop in realization. COVID-19 impacted the 2H FY20 property rentals. Its EBITDA margin deteriorated to 52.1% in FY20 despite overhead cost reduction by $31 million. During the year, VCX realized valuation loss across its portfolio and recognized impairment of $427 million. In addition, profitability was affected by property valuation decline of $1,1718 million. VCX reported net loss of $1,801 million in FY20 as against profit of $346.1 million in last year. Its operating cash flow plunged to $472.0 million as compared to $662.1 million reported prior year. Its cash balance of $227.4 million was boosted by deferment in capex outgo and proceeds of $1,200 million from issuance of equity shares. Debt levels seems moderate, the company realized $950 million from new and extended bank facilities. VCX has favourable debt schedule with average duration of 5.2 years.
Outlook: With stores re-open, visitation returns to 79% of pre-COVID at Melbourne. VCX released trading updates for Q1 September 2020. It experienced decline in annual turnover over last year. The company completed a $63 million expansion in Western Australia. VCX received approvals for expansion in Victoria and New South Wales. The company to continue to pursue cost cutting and to keep capex on lower side. The gearing ratio is expected to reach low-end target range of 25% to 35% following the issuance of equity shares.
As per data released by Australia Bureau of Statistics, New South Wales witnessed an increase of 32.1% in dwelling units approvals in October 2020 over prior month. This corresponds to VCX expansion with five projects coming-up in NSW with potential to add 330,000 sqm.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs VCX (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company yielded returns of +25.36% in last one month. In Q1 FY21 trading update, the company mentioned that visitation returns to 79% of pre-COVID at Melbourne. It had raised funding of $1,200 million in FY20 to support its expansion plans. The company lined up expansion plans to develop retail centres in Victoria and New South Wales. It had already completed expansion in Western Australia. The stock performed ahead of the market volatility index. The stock generated annual dividend yield of 9.09% through portfolio and fund management. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation, key risks, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.755, up 2.03% on 7th December 2020.
3. Cedar Woods Properties Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 551.47 Million, Annual Dividend Yield: 2.78%)
Achieved Higher Pre-sales and Added New Properties: Cedar Woods Properties Ltd. (ASX: CWP) is a property developer with assets in South Australia, Queensland, Victoria, Western Australia. The company operated with 9,017 units and 30 projects covering the four states as of June 2020. Revenue slumped by 30.5% in FY20 over prior year. Social distancing norms delayed project construction. A large portion of settlements that were previously anticipated in May and June 2020 are now delayed to early FY21. CWP faced difficulty in procuring building materials due to trade tension with China. Its EBITDA margin dropped from 19.4% in FY19 to 13.4% in FY20 due to promotional sales offers and change in product mix. It had reported negative operating cash flows of $15.5 million as compared to positive operating cash flows of $33.1 million. During the period, CWP acquired additional properties in Victoria and Queensland to add 1,100 dwellings/ lots to the portfolio. These acquisitions were funded through available cash and debt proceeds raised. It had cash balance of $2.7 million with no nearing debt maturities. As settlements started to show improvement in July 2020, the company raised additional debt with unused borrowings increased to $85 million as at July 2020. It also extended the terms from 3 to 5 years for National Australia Bank facility.
Outlook: The HomeBuilder scheme (of $25k grant) along with the Building Bonus Package (of 20k grant) by the WA State government saw increased sales enquiry and the company achieved WA pre-sales of more than four times. Social distancing delayed the number of settlements going into FY21. But CWP secured pre-sales contract of $360 million expected to settle over FY2021 and FY2022, with about 2/3rd expected to settle in FY2021.
As mentioned in the company presentation, WA to witness 24% growth in dwelling starts for FY21. It had about 14 projects (with over 5,000 lots/ dwellings) in WA alone. Its additional 2 new developments to improve topline growth in FY21. This corresponds to the data release by Australia Bureau of Statistics which mentioned that dwelling units approval in WA surged 29.7% in October 2020 over previous month.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs CWP (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The company is optimistic about FY21 results. It mentioned that it will realize about 2/3rd of its pre-sales contracts (of $360 million) in FY21. It added about 1,100 dwelling units to Victoria and Queensland market. The company witnessed increasing sales enquiries specifically in Western Australia. The stock performed with rising 14.72 returns in the last one month. It is trading well above the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $6.780, down 0.73% on 7th December 2020.
4. Wagners Holding Company Ltd. (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 367.84 Million, Annual Dividend Yield: 0%)
Uptick in Revenues: Wagners Holding Company Ltd. (ASX: WGN) operates as construction materials company with customers in Australia, the US, Papua New Guinea & Malaysia. The company’s Construction Materials and Services segment reported higher offtake from resources sector that drove the bulk transport haulage business. Its New Generation Business Materials (NGBM) segment saw increased adaption of Earth Friendly Concrete and Composite Fibre Technologies which resulted in overall revenue growth of 5.4% over previous year. Contraction in EBITDA margin to 10.7% was on account of increased repairs and maintenance costs and lower margin work performed during the year. In addition, its NGBM segment witnessed higher R&D spend. Net profit plummeted on the back of higher D&A for transport and quarry capital expenditures. Further, WGN reported impairment expenses of $5.45 million towards receivables. Operating cash flows plunged from $24.0 million in FY19 to $1.1 million. WGN realized proceeds of $40.0 million from rights issue. It had reported cash balance of $3.4 million as of June 2020. Debt levels seems higher – the company able to extend the expiration date of its existing facilities to January 2022.
Outlook: WGN expects favourable demand from pedestrian infrastructure and road bridge market to drive NGBM segment. Further, the company intends to ramp-up USA and Middle East market through rigours R&D and product development. It is setting-up ready-mix concrete plant network to support its cement and quarry businesses. The company received crushing contracts through acquisition of Shepton Quarry.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WGN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The vertically integrated operations supported its New Generation Business Materials (NGBM) segment for new businesses. Following the acquisition of Shepton Quarry, WGN received crushing orders. The stock gained 43.46% in the one month. It had performed well ahead of market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.030, up 3.31% on 7th December 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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