Developers on their knees: part two

A portrait of Sir Albert Victor Jennings hangs in the National Portrait Gallery commemorating Australia’s pioneer of mass-produced and mass-marketed housing. Jennings started out in 1933 during the Great Depression, and by 1980 A.V. Jennings Construction Co. had built 80,000 homes offering ‘millionaire enjoyment for working-class value’ (read built-in robes came as standard).
The AVJennings we recognise today was formed when ASX-listed property group Long Homes purchased the homebuilding division of the failed Jennings Group in 1995. Later, in 2002, SC Global Developments, a Singaporean property group managed by Simon Cheong, acquired a large stake in AVJennings which recently increased to 49.6% – Cheong became chairman of AVJennings in 2004.
On 29 Mar 06 (Speculative Buy – $1.31) we clutched at the coat-tails of shrewd value investors Sir Ron Brierley and Gary Weiss of Guinness Peat Group (GPG), which would try in vain to unlock the value in AVJennings’s land bank.
Unfortunately GPG’s attempt to win two board seats in 2007 was thwarted by SC Global, leaving GPG frustrated and potentially eyeing the exits. So with our original investment thesis resembling more of a shanty town than a modern AVJennings community development, and a share price that has fallen 66%, should we stick around or lead GPG out the door?

Herd mentality

Although most of AVJennings’s profit stems from land development, it also builds homes and apartments, combines them with land packages and offers contract building. But within that framework, the company’s herd-following strategy has swung wildly: in 2005 it targeted affluent homeowners and boasted of a dearth of commercial property exposure; in 2008, to combat deteriorating housing affordability and home sales, the company backflipped into commercial property construction, where it lacks a competitive advantage, and is building cheaper homes that may be undermining the brand that GPG holds in high esteem.
Approval for an Australian Financial Services Licence, granted on 12 July 2007, also suggests the company considered joining the crowded ranks of property fund managers. And joint ventures established in 2007 confirm management’s attempt to circumvent the inherent growth limitations of its balance sheet and property generally – behaviour which has resulted in a painful round of capital-raisings at GPT Group, Goodman Group and Mirvac, to name a few.

Value destroyer

Since Cheong assumed the chairmanship, the company has failed to capitalise on the residential property boom, as you can see in the accompanying chart. Net tangible assets (NTA) per share have fallen from $1.22 in 2004 to $1.13 currently, and that includes 25 cents of interest costs masquerading as assets, otherwise known as capitalised interest.

Debt remains high and AVJennings’s solvency is threatened by loan facilities expiring in 2009 and 2010. This prompted a poorly supported one-for-three rights issue in May (SC Global participated but almost 90% of minority investors didn’t), which was tantamount to handing back years of dividends.
Management has been praying for a housing recovery for years but, with unemployment rising, the downturn could be severe and protracted, as we discussed in our special report titled What’s your house really worth?.
The valuation is enticing, though, with shares currently trading at a 49% discount to NTA of $0.88 (excluding capitalised interest). But as GPT recently demonstrated, good management creates value while poor management destroys it. AVJennings sits squarely in the latter grouping.
With GPG unable to apply its skills and experience, and the prospect of further equity-raisings, despite the share price falling 51% since 11 Feb 08 (Hold - $0.91), we recommend shareholders SELL.

Tamawood a breath of fresh air

Compared to the four highly geared property developers we’ve looked at so far, $66m kit-home builder Tamawood is a breath of fresh air. Managing director and majority shareholder Lev Mizikovsky emigrated from Russia to Australia aged 21, before spending six years in New Zealand. He returned in 1988 aged 32 and, after brief periods selling real estate and working as an estimator, he founded Tamawood in 1989 with just four staff and five licensed builders. The company bravely listed in August 2000 following the initial bursting of the dot-com bubble.

Between 35% and 50% of the company’s profit now comes from building homes in Brisbane and southeast Queensland. The remainder comes from services and products sold to an army of licensed builders and a small, but growing, squadron of fledgling franchisees.

Mizikovsky is Australia’s Henry Ford of affordable home construction, investing millions in the latest production techniques to reduce manufacturing costs. Tamawood’s flat-pack (ready-made) kitchens sourced from China, for example, not only litter its own developments, but are also sold directly to builders. Mizikovsky says he believes it makes the company the lowest-cost builder in Queensland.

Conservative approach

It must also be one of the most risk averse. Mizikovsky apparently got a roasting from his father when he owned up to borrowing 40% of the purchase price for a bunch of apartments, and the confrontation has stayed with him – Tamawood is funded solely from retained profits, with not a scintilla of debt to be found.

Mizikovsky also forgoes his cash dividends, preferring instead to bankroll Tamawood by increasing his stake through the company’s dividend reinvestment plan. This conservative approach sits in stark contrast to many of Tamawood’s peers and, come feast or famine, we expect the company to be around for years to come.

The company has its fair share of problems, though. Booming demand has caused project delays and mistakes that have upset customers. But most worrying of all is that Mizikovsky plans to retire in three years’ time – and he doesn’t intend to keep his shares when he goes. He’s already had some interest from one large investor and hopes to draw several more. For now, though, Tamawood’s extremely low liquidity prevents us from commencing official coverage.
With the stock down 46% since reaching $3.41 in October 2007, it’s now on a PER of less than 7. If you want exposure to the pointy end of the property market without fear of interloping lenders, this could be the way to bet. NO VIEW.