Those investors who ploughed money into the devastated listed property market in 2009 have made enough to retire on. While the low-hanging fruit has disappeared, there are still some opportunities in the sector worth investigating.
Villa World Ltd
Last year we singled out Queensland-based developer Sunland Group as a deep-value play, with its shares trading at a steep discount to asset backing. Sunland's price has risen 100 per cent over 12 months and its discount to assets has shrunk to about 10 per cent.
Another Queensland-based group going through a similar process is Villa World. The company has been buying back shares and attempting to sell assets to crystallise value. Its share price has also been travelling higher in recent times but remains at a 35 per cent discount to the stated asset backing.
The company is negotiating to sell its Eynesbury project in Victoria. These negotiations have been extended one month until the end of May. With the group's balance sheet a little stretched, selling the property would be a catalyst for the stock to move higher.
If the company does not sell the project, the share price could soften in the short term, creating a buying opportunity for investors. The stock is worth 30 per cent more than it is trading today.
The first of the major private equity deals of recent years has found its way to the market. Quadrant Funds hopes to sell the majority of its holding in Virtus Health through an initial public offering, with the company listing on the exchange on June 11.
Virtus accounts for about 35 per cent of the IVF cycles performed in Australia.
Patients pay Virtus upfront and are able to gain partial reimbursement from Medicare and private insurers. A key business risk is the long-term uncertainty about receiving reimbursements.
The float involves a sell-down of existing shares and the issue of new shares. The offer will be $264.2 million to $291.5 million, depending on the final price. Early indications are that demand from investors is strong and the stock will be priced at the top end of the price range of 12.5 times to 14 times 2014 net profit after tax and adjustments (NPATA).
For many the 14 times multiple will be too steep for an asset coming out of a private equity firm. This is a legitimate concern and given there is no other listed comparison there is risk involved. Critically, industry dynamics are positive and the company should achieve low double-digit earnings and revenue growth over the next few years.
It has also committed to paying out 65 per cent of earnings in dividends in 2014 and then between 50 per cent and 70 per cent from that point onwards. Virtus will have a 4.6 per cent yield in 2014.
The gearing levels are on the high side, but with little capital expenditure in the near future and positive working capital, debt should fall. If the stock trades above 16 times 2014 NPATA it would be wise to depart unless earnings growth accelerates.
The fall in the Australian dollar has ignited share prices in a range of companies with big offshore operations, including Brambles, Sims Metal and Amcor.
The softer dollar has also been the catalyst for a major selloff in the discretionary retail sector. Most Australian retailers source their goods from Asia in US dollars. A stepdown in the local currency means retailers will have to pay more for their goods, putting pressure on gross margins.
Compounding the situation is commentary coming from a range of companies saying sales growth has stalled despite the May interest rate cut and a rekindling of activity in the housing market. Stocks such as Myer, Specialty Fashion, JB Hi-Fi and Noni B have turned south quickly. This soft demand might trigger another interest rate cut but it would advisable to stay clear of this sector until the dollar settles and demand reappears.
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