Villa World Limited

VLW announces Q3FY19 Operational Updates: Villa World Limited (ASX: VLW) has an engagement in the development and sale of residential land, along with development, construction, and sale of house and land packages. The company recently published Q3FY19 operational update, where it highlighted that in late CY18, Australia’s residential housing market conditions and customer sentiment declined, and have remained subdued to date in CY19. The company has recorded 783 sales for the financial year to the end of April 2019, including 266 sales during the first four months of CY19.

Moreover, due to increased regulatory compliance requirements, customers experienced delayed in the finance approvals.Therefore, both the carried forward sales and new sales are taking longer than anticipated time to close. Resultantly, around 80 to 115 settlements previously expected in H2FY19 will shift to FY20. VLW announced that it is working closely with AVID Property Group Australia Pty Ltd (AVID) to facilitate its due diligence investigations, for the binding proposal from AVID for 100% of the shares in the Company at $2.345 per share.

In its dividend policy, VLW mentioned about its payout ratio which ranges between 50% to 75% of annual NPAT, paid semi-annually. The Board will give further consideration to the 2H19 dividend once there is further clarity regarding the company's FY19 results.

Any H2FY19 dividend will also need to be considered in light of the AVID acquisition proposal, given that the offer price of $2.345 per share will be reduced by any dividends that shareholders become entitled to receive on or after 1 May 2019.


H1FY19 Sales Metrics (Source: Company Reports)

What To Expect: The company will not be providing any guidance for FY19, due to the uncertain outlook for the sector and the continued uncertainty of sales and settlement timing. The Company currently expects that the FY19 gross margin will be within the target range of 23% to 25%. The Company anticipates that customer sentiment is likely to improve following the Federal Election, and that finance conditions may free up during the second half of CY19, as lenders work through the repercussions of the Banking Royal Commission. VLW has continued to work on invigorating its sales strategy to highlight its value across the affordable housing sector.

The business cost structure continues to be managed in light of current trading conditions, with the results likely to mostly impact FY20. The Company believes that its projects are located where people want to live, its homes are priced within the reach of its customers and its turnkey homes offer a unique customer experience.

The Company has strong carried forward sales being carried into FY20 and beyond which combined with sound financial fundamentals, prudent capital management and a committed team, gives the platform to continue to deliver shareholder value beyond the current sector dynamics.

Stock Recommendation: At CMP of $2.210, its annual dividend yield stands at 8.19%. Its ROE for H1FY19 stands at 5.9% which is better than the industry median of 5.0%, signifying better returns for its equity-holders than its peer group. Its current ratio for H1FY19 stands at 3.39x, better than the industry median of 1.48x, which implies that the company is in a better position to address its short-term obligations.

Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $2.210 (down 2.212% on May 15, 2019).
 

Cromwell Property Group

Decent Performance in 1HFY19: Cromwell Property Group (ASX: CMW) has an engagement in property investment, funds investment, property management, and property development.

The company, in its business update for May 2019, highlighted its present position in the different geographies in which it operates. In the last August, it commenced its ‘Invest to Manage’ strategy, which has helped the company in its asset recycling initiatives and uses its existing investment capacity, the proceeds from recycling and some cash from operating earnings to invest in opportunities that create new recurring revenue. The strategy is designed to build enterprise value, add to medium-term earnings and generate higher total securityholder return.

In Australia, CMW received Development Approval (DA) after the results’ presentation for a $75 million value-add opportunity at Victoria Avenue, Chatswood.The work is expected to start in a couple of months this year. It also expects to submit a DA for a mixed-use development at 700 Collins Street in Melbourne.

In the United Kingdom (UK), CMW has been engaged in preliminary confidential discussions with RDI REIT P.L.C. The company has confirmed its subsequent intention not to make an offer within the proscribed timeframe.

In Europe, CMW acquired the 21,688 sqm Pirelli Tyre Research & Development Facility (worth €88 million) in Milan, Italy on behalf of a new Korean capital partner.

In Singapore, the Cromwell European REIT (CEREIT) had its first annual general meeting last week. Cromwell’s 35% stake is currently worth more than $400 million. It is turning out to be an excellent investment for both Cromwell and CEREIT securityholders.

In another update, CMW has clarified that it has not received an offer from ARA Asset Management (ARA). ARA has recently acquired a small number of securities in CMW to take its final holdings to 20.09%.

H1FY19 Financial Performance: Its statutory profit increased by 37.5% pcp to $111.1 Mn, whereas its operating profit increased by 7.6% pcp to $82.6 Mn. Its net tangible assets increased by $0.06 pcp to $0.99.


H1FY19 Financial Metrics (Source: Company Reports)

What To Expect: Global trade tensions, Brexit and the possibility of slower economic growth in China, Europe and the US have resulted in downward revisions to global growth forecasts. In Australia, uncertainty around the upcoming federal election and potential changes to taxation policies, the residential market downturn as well as implications for the financial services sector from the Hayne Royal Commission have contributed to significant falls in Australian consumer confidence and business conditions generally. However, the company has strong balance sheet with liquidity and optionality. Its net tangible asset is up, and its gearing is below the target range. Its Weighted Average Lease Expiry (WALE) is 7.2 years. It has low upcoming incentive and maintenance capex requirements. All these parameters are expected to help the company to deliver a better value to its shareholders.

FY19 Guidance: Its Operating profit is expected to be no less than 8.00 cps and distributions no less than 7.25 cps, representing an operating profit per security and distributions per security yield of 7.31% and 6.62%, respectively based on a closing price of $1.095 per security on 27 February 2019.

Stock Recommendation: At the current market price, its annual dividend yield stands at 6.43%. Its gross margin for H1FY19 stands at 85% which is better than the industry median of 73.3%, displaying that the company is in a better position to address its operating expenses than its peer group. Its current ratio for H1FY19 stands at 2.09x which is better than the industry median of 0.62x, implying better liquidity position to address its short-term obligations.

Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $1.160 per share (down 0.855% on May 15, 2019).

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