Cedar Woods set to benefit from a housing rebound
Have house prices and building activity bottomed? It sure seems that way – even if the trend is still negative. And that’s great news for businesses exposed either directly or indirectly to the construction industry. One business set to benefit is WA-based Cedar Woods Properties (ASX:CWP).
Established in Perth in 1987, CWP describes itself as a national developer of high-quality residential communities and commercial developments.
In 2019, CWP generated a return on equity of almost 13 per cent and grew profits by 14 per cent, on a 56 per cent jump in revenue.
Last week CWP presented at its Annual General Meeting and noted the following:
While enquiry and sales volumes are still well down from peak levels, first quarter 2020 pre-sales are up nine per cent year on year from $376 million to $409 million and up 24 per cent from the $330 million reported at the FY19 results. At the time of those results, presales had risen three per cent to $330 million year on year. In other words, presales are indeed accelerating.
With lower interest rates, better access to mortgage credit and meaningful Federal and State first home buyer stimulus taking effect from 1 January 2020, the company expects market conditions to improve. Also taking effect in January 2020 is the Federal Government’s Loan Deposit Scheme that eliminates the need for lenders’ mortgage insurance. Meanwhile, Western Australian is offering 75 per cent stamp duty rebates for ‘off the plan’ apartment purchases in Western Australia.
Keep in mind CWP’s quality affordable housing projects, including the entire suburb of Williams Landing in Victoria, Bushside and Glenside is SA and recent site acquisitions such as in Wollert (VIC), and Subiaco, Hamersley, Piara Waters and Brabham in WA.
In addition to the uptick in approvals, other leading indicators such as AFG’s mortgage applications are improving. AFG’s mortgage application index is up 21 per cent year-on-year for the first quarter of FY2020.
CWP has a strong balance sheet with net debt to equity of just 28 per cent, and trades on a PE of 12.7 times and dividend yield of 4.7 per cent. While net assets include capitalized costs of developing the master planned sites, the market capitalization of CWP is $583 million or 155 per cent of NTA with the capacity to internally fund 15 per cent.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
jimbo james
:
Dumb questions Roger but what happened to the construction jobs cliff we weren’t even close to ?! Are you suggesting a successful policy fix? Who’s paying for it and how?
Roger Montgomery
:
It’s still ahead. I am recording a video that mentions it in the next few minutes. Should be published tonight or tomorrow. Stay tuned
Dan Norton
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How can this be a value proposition if the share price has rallied hard over the last year? Doesn’t that suggest the market has already well priced in these potential benefits to the company?
Roger Montgomery
:
It may be that its no longer cheap, but I need to clarify for you that a price rise by itself doesn’t mean a stock no longer represents value. I discuss this in my book Value.able. A stock can rise 100%, or more, over the course of any time frame, and it could still be cheap. If the intrinsic value of the company is higher than the current price, no matter what the share price was before, it is cheap. One way a stock can become cheap is if it’s share price falls below its intrinsic value. But that isn’t the only way. If a company makes an announcement of an improvement in prospects or profitability, its intrinsic value is higher. The shares may rise following the announcement but if the intrinsic value has risen even more, the stock could be cheaper after its reaction than before. I hope that helps Dan.
Dan Norton
:
Thanks for your thoughts Roger
John
:
“While enquiry and sales volumes are still well down from peak levels, first quarter 2020 pre-sales are up nine per cent year on year from $376 million to $409 million and up 24 per cent from the $330 million reported at the FY19 results. At the time of those results, presales had risen three per cent to $330 million year on year. In other words, presales are indeed accelerating.”
Roger, maybe this seller is trying to clear all its land off its books by dropping prices and is offering other incentives (bonuses, more amenities like a country club etc) to bring in the buyers (relative to other sellers) – which in a falling market would be the smart thing to do but would mean this would mean the acceleration in sales would be not only short-lived but will exhaust the supply of buyers.
Roger Montgomery
:
Yes, discounting is a possibility to incentivise activity and it does bring sales forward. Good observation John.