AVJennings Homes Limited
Recommendation
In our initial review of this homebuilder on 29 Mar 06 (Speculative Buy – $1.31), we made the out-of-character declaration that ‘our recommendation is based almost entirely on following (the) smart money’. The investment thesis, speculative as it was, relied on following the lead of corporate agitators Guinness Peat Group, which had amassed a chunk of AVJennings shares.
Despite GPG’s best efforts over 2007, it failed to gain a board seat and recently announced that its shareholding has reduced from 11.5% to 9.1%. This wasn’t the result of on-market sales but the expiry of a long term option to buy shares at $1.30. We’re not sure what GPG’s strategy is now but, having been defeated in its agitation endeavours and with little hope of future success, it wouldn’t surprise us if it sold out at some stage – which would trigger a rethink of our original investment thesis.
We’re also concerned by AVJennings’s push into areas outside its core residential business. The company has made a big song and dance about the move into commercial development, and announced deals such as the new office complex at Sydney Olympic Park.
The company’s strategy has little of the counter-cyclical thinking that might impress. NSW suffers a tough economic period and so the company expands significantly in Queensland and Victoria. Residential property goes through a tough period and the company starts looking at commercial property. It smells like reactionary behaviour, not opportunism.
We’ll watch developments closely and eagerly await the half-yearly results but, despite the 27% share price fall since 22 Aug 07 (Speculative Buy – $1.245), our confidence has waned and we’re no longer comfortable committing fresh capital to it. We’re downgrading a notch to HOLD.