Fleetwood Corp

Shares in Fleetwood dropped about 25% on Tuesday after the maker of caravans and manufactured accommodation said it was reviewing ‘the extent of commitment’ to its proposed Gladstone Village in Queensland.

The development had been expected to house up to 1,000 transient workers and construction, originally scheduled to begin in the first quarter of the 2013 financial year, had already been pushed back to April 2013. The implication of yesterday’s announcement is that it may now go ahead in reduced form or even not at all – which is a worry since the company signed a 10-year lease on the 23-hectare site in April last year.

Fleetwood also said that its Searipple Village in Karratha, WA, was suffering from oversupply and that this was affecting its earnings. The company had been hoping for a pick-up in occupancy at Searipple after upgraded units became available in March. So the worry here is that these improved units have been unable to stem the margin slide caused by oversupply. This isn’t particularly surprising – if you’ve got four units and three mine workers, you’re not going to be able to charge much for them no matter how plush they are.

As we warned in Ignore Fleetwood’s siren call on 17 Dec 12 (Avoid – $9.39), this is a high fixed cost business and if ‘resources activity dropped dramatically, things could quickly look very ugly indeed'. So it has proved.

Osprey Village being built near Hedland, WA, (which has a government-guaranteed 15-year return) is apparently proceeding well and the education and lifestyle areas of manufactured accommodation are seeing ‘improved prospects’.

It’s small consolation, though, because overall Fleetwood is expecting second-half earnings 'marginally below' those recorded in the first half, compared to the ‘improved result’ expected at the interims, implying a fall in net profit from continuing operations of about 68% to $17m.

The stock is now down 40% since 17 Dec 12, but with the lower earnings the underlying price-earnings ratio is still as much as 20. Given the uncertainties over Gladstone and the troubles at Searipple, that’s too high. AVOID.