Fleetwood: Result 2014
Recommendation
Salvation came from an unexpected source for Fleetwood. The company's full year result confirmed that its two primary businesses – supplying accommodation to the mining industry and manufacturing and selling caravans – both continued to struggle. Yet stronger sales of buildings to the education sector in Queensland, Victoria and Queensland saved the business from reporting a loss. It was close though: profit was less than a million dollars.
Encouragingly, revenue rose 10% to $367m as sales of manufactured accommodation rose. Margins in the business, however, halved from 14% last year to 7% this year. Earnings before interest and tax (EBIT) from the building division were 50% lower at $16m for the full year. Only two years ago the division was generating EBIT of $75m.
The big change has come from changing fortunes at Searipple, Fleetwoods largest accommodation village, where occupancy sank to just 40% and rates continued to slump. Since costs are largely fixed, margins shrank too. Operating leverage is wonderful in boom years but hurts when the boom ends.
Key Points
- Profits crunched
- Poor conditions in both major businesses
- Price reflects bad news: Spec Buy
Searipple is fully depreciated and not recorded on the balance sheet. Fleetwood should be able to run the asset for cash and we expect deep discounting to raise occupancy rates.
New villages, new visitors
Interestingly, tourists have taken up residence at the village, currently accounting for about 20% of tenants, which suggests the location and facilities are better than the average mining village. Searipple remains the largest swing factor in the performance of Fleetwood. Any improvement here will flow directly to profits.
Year to June 30 | 2014 | 2013 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 367 | 334 | 10 |
NPAT ($m) | 0.8 | 12.4 | (99) |
Operating cash flow ($m) | 31 | 25 | 24 |
EPS (c) | 0.1 | 20.8 | (99) |
DPS (c) | 4 | 4 | n/a |
Yield (%) | 1.9 | 1.9 | n/a |
Franking (%) | 100 | 100 | n/a |
A new village in Queensland was also announced. Although a lease term of just 20 months is short, it does utilise existing buildings and will generate additional cash. Cash flow from this and the Osprey village will be fully reflected in next year's result.
The RV market was, again, weak, contributing an operating loss of $2m. Fleetwood has begun a restructure of the business. Dealers now sell multiple caravan brands rather than duplicating the network; manufacturing is sourced offshore and lower cost products are being offered. These are simple steps that suggest the division received little management attention during the resources boom. Despite weak demand, losses are subsiding as costs fall.
Strong cash flow
In an otherwise dim result, strong operating cash flow was a highlight, increasing 24% to $31m. Although the company was cash flow negative, capital expenditure included the completion of new villages that will add to future cash flow. Debt rose to $56m but $32m of that is tied to government backed Osprey contracts and should start to fall next year.
Surprisingly, the company paid a final dividend of 2 cents per share (fully franked, ex date Sep 1) taking full year dividends to 4 cents, a yield of 1.9%. This was more a symbolic gesture than a windfall, a step suggesting management are confident of better times.
The market is more sceptical of that claim. Fleetwood trades at just 80% of its net tangible asset value and it largest asset, Searipple, isn't even counted on the balance sheet. Although conditions are grim, the business is already priced for misery.
The share price fell heavily following the results announcement and is now down 9% since Fleetwood going for a song (Speculative Buy - $2.23) and 20% below our initial buy price in Fleetwood: a buy after the bust (Speculative Buy - $2.54). This is a contrarian idea that will demand patience, and may cause restlessness, but it is also genuinely cheap. SPECUALTIVE BUY.
Note: The Growth portfolio owns shares in Fleetwood.