Watch project sale for clues on developer's share price
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.
Virtus Health
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.
Discretionary retail
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.
matthewjkidman@gmail.com
Fairfax Media takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
Villa World’s share price has been rising recently after the company has been buying back shares and trying to sell assets to crystallise value. Despite the improvement, it was still trading at about a 35 per cent discount to its stated asset backing at the time of the article, so investors watch it as a potential deep-value developer play.
Villa World was negotiating the sale of its Eynesbury project in Victoria, with talks extended until the end of May. Selling the project would be a clear catalyst to push the stock higher given the group’s a slightly stretched balance sheet. If the project isn’t sold, the article says the share price could soften in the short term — which might create a buying opportunity, since the stock was estimated to be worth about 30 per cent more than it was trading.
A discount to asset backing means the market value of the company’s shares is below the stated value of its assets. The article highlights Sunland Group as having seen its share price rise 100% over 12 months, shrinking its discount to around 10 per cent. Villa World, despite recent gains, was still trading at roughly a 35 per cent discount, which is why both were discussed as deep‑value opportunities.
Investors should watch catalysts that can crystallise value such as asset sales, share buybacks and the health of the balance sheet. Look at discounts to asset backing, project sale progress (for example Villa World’s Eynesbury negotiations), and how stretched the balance sheet is — successful asset sales can push stocks higher, while failures can cause short‑term weakness.
The first big private equity sell-down discussed was Quadrant Funds’ plan to sell most of its holding in Virtus Health via an IPO, with the company set to list on the exchange on June 11. Virtus performs about 35 per cent of IVF cycles in Australia. The float involved both sell‑down and new shares, with the offer size between $264.2 million and $291.5 million and an expected pricing range of about 12.5 to 14 times 2014 NPATA.
Positives: industry dynamics were described as positive and the business was expected to deliver low double‑digit earnings and revenue growth in coming years. Risks: a key business risk is long‑term uncertainty about receiving partial reimbursements from Medicare and private insurers, and many investors may find the 12.5–14 times 2014 NPATA multiple steep for an asset coming out of private equity.
Virtus committed to paying out 65 per cent of earnings as dividends in 2014 and then between 50 per cent and 70 per cent thereafter. The company was expected to have around a 4.6 per cent yield in 2014 according to the article.
The softer Australian dollar helped the share prices of companies with big offshore operations (such as Brambles, Sims Metal and Amcor), but it sparked a sell‑off in the discretionary retail sector because most Australian retailers source goods from Asia in US dollars. A weaker AUD raises their costs and pressures gross margins. The article cited Myer, Specialty Fashion, JB Hi‑Fi and Noni B as examples of retailers whose stocks had turned south, and advised staying clear of the sector until the dollar settles and demand reappears.
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