AVJennings feels the downturn

Part of the reason has been the poor results, which we discussed in issue 200/May 06 (Speculative Buy—$1.20)—although these were far from unexpected. There’s also been some controversy surrounding the group’s underwritten dividend reinvestment plan (DRP), which got GPG’s goat. But arguing over who gets to underwrite the DRP misses the main point. Underwritten DRPs—the dividend you pay when you’re not paying a dividend—are a complete waste of shareholders’ money, in terms of any fees paid and any dilution incurred (see the Investor’s College of issue 152/May 04 for more on this).

Perhaps a more important factor is the continued weakness in east-coast property markets, particularly Sydney. According to the company, housing approvals are the lowest they’ve been in 30 years. But much of the downturn must be credited to the old adage that bust follows boom.

Attractive land bank

Management seems to be counting on a return to form in 2008, but we’re not convinced. By historical standards, this downturn in Sydney house prices has been pretty mild and we wouldn’t rule out the possibility of significantly more pain. Even several years of flat prices, though, would restrain development activity.

AVJennings does have an attractive land bank and its market-leading position bodes well for its chances of riding out any serious downturn. But the intensely cyclical nature of this business and the company’s high debt levels do present risks and explain why this is a speculative recommendation.

The stock is trading at a 9% discount to its net tangible asset value of $1.19, and those willing to take a punt are able to do so at prices below those paid by the smart money. Our recommendation remains SPECULATIVE BUY for up to 3% of your portfolio.

Gareth Brown