Fleetwood for the long haul

When we last covered Fleetwood in Fleetwood: A better buy (Speculative Buy - $1.34), all appeared grim. The business had a large debt pile due imminently; there were no improvements to its operating businesses and it was in dispute with the WA government about financial terms for a key asset.

Back then, we argued things were better than they seemed. Losses from RVs could be stemmed; Searipple provided optionality and manufactured accommodation continued to generate cash. Osprey, we prophesised, would likely be bought by the WA government to allow the business to lower debt.

Yesterday, Fleetwood's share price rocketed 20% as the company announced exactly that outcome, making our speculation look like soothsaying. The WA government has paid $62.2m for Osprey and will take full ownership of the asset. Fleetwood has already used the proceeds to repay debt and is now debt free.

Fleetwood may no longer collect rent from Osprey but it will still earn a fee for managing the village. It will likely collect a few million dollars a year every year for 14 years. This is a splendid outcome for the business.

Eliminating debt not only lowers risk, it also saves about $3m a year in interest costs that will flow directly to the bottom line. It may not sound like much but, considering Fleetwood reported no earnings last year, it matters.

With Fleetwood's share price rallying since our last review (although it is still below the initial buy price in Fleetwood: a buy after the bust (Speculative Buy - $2.54)), what should investors do now?

More good news

The asset sale hasn't been the only piece of good news for Fleetwood. The company had earlier announced Rio Tinto had taken an option for 60% of the Searipple village while, separately, Gateway Lifestyle, an operator of housing estates, has appointed Fleetwood as the exclusive provider of manufactured accommodation. With further operating improvements possible because of these deals, selling now leaves too much value on the table.

Let's have a look at how these developments change our valuation.

Osprey is no longer on Fleetwoods books so its value can only reflect the value of the management contract for which details won't be released. We can, however, estimate its worth. If we assume an annual fee of $2m and an EBIT margin of 60%, that income stream would be worth about $10m today.

Our valuations for the RV division, Searipple and the manufactured accommodation division remain unchanged from Fleetwood: a better buy but debt now falls to zero.The results are shown in Table 1. Our low valuation rises from $1.20 to $1.50, our base case increases to $3 and our high case to almost $4. Despite the share price increase, Fleetwood is still cheap.

Our recommendation guides remain unchanged although we acknowledge that risks are far lower than previously and the odds of a decent outcome are higher than they were. Fleetwood remains a SPECULATIVE BUY. 

Note: The Growth portfolio owns shares in Fleetwood.

Disclosure: The author, Gaurav Sodhi, owns shares in Fleetwood.