It’s been a long journey for Fleetwood shareholders. Once a market darling, the business has had to fight the end of the mining boom and poor performance in its recreational vehicle (RV) business to reclaim the affections of investors.
Fleetwood’s full-year results suggests it still has some way to go, although progress is being made. On a statutory basis, a loss of almost $10m looked disastrous and, even adjusting for an asset impairment, underlying earnings before interest and tax (EBIT) of less than $1m don’t flatter.
On a PER of over 100, Fleetwood looks downright rotten. Yet the numbers deceive.
Low aggregate profits
Losses confined to one division
Operating improvements not reflected in revenue
Fleetwood comprises two divisions: an RV business and a manufactured accommodation business. As in previous years, it generated decent profits from accommodation and lost it all in RVs. What looks like a poorly performing business actually reflects one poorly performing division. And things are improving in RVs.
In Fleetwood starts to turn, we reported from a trade show visit to highlight that Coromal and Windsor, Fleetwood’s RV brands, had refreshed models and designs. Those changes have led to dramatically higher sales volumes.
The impact isn’t yet clear on the revenue line but will be next year after a full year’s contribution. Fleetwood’s factory has doubled production rates over recent months and sales have increased accordingly.
It is still unlikely to generate a profit next year but we are closer to economic factory utilisation than we have been for years and the $8m loss made from RVs should narrow.
Within two or three years, we expect losses should be eliminated altogether. If this doesn’t happen, Fleetwood should sell the division.
For the first time, Fleetwood has provided detailed segment data which reveals two surprising things. Firstly, the RV accessories business generates lower margins and is more capital intensive than expected, generating less than $1m in EBIT from revenue of $82m and an asset base of $54m.
|Year to June ($m)||2016||2015|| /(–)
|Op cash flow||66.9||42.1||58|
Secondly, the villages division, which includes Searipple and Osprey, generate more money than expected.
With occupancy levels around 60%, Searipple appears to be decently profitable thanks to the exclusive supply agreement with Rio Tinto. Management fees from Osprey aren’t disclosed but we suspect they are higher than earlier estimates.
In aggregate, Fleetwood generates about $8m in EBIT from the division, a return on assets of 28%. This is an excellent outcome considering dire industry conditions.
The rest of the manufactured accommodation business, which targets the education and affordable housing sector, earns lumpy revenue that swings with individual deals and made $3.5m in EBIT. Although margins from this division are just 2.5%, demand from customers is high and growing.
A consistent highlight of any Fleetwood result is cash flow and last year was no different. Operating cash flow rose 60% to $67m, although this was boosted by $56m of cash proceeds from the sale of the Osprey Village. Excluding this, free cash flow was $11m, giving the stock a free cash flow yield of about 10%.
Free cash flow is lumpy and excludes amortisation and depreciation – which are genuine costs – so this measure overstates profits but it does make an important point that other valuation metrics do not: Fleetwood remains attractive.
Dividends haven’t been restored this year but, with the business showing net cash (a stunning turnaround from the $60m debt pile of just 18 months ago) – we expect the healthy franking balance to be utilised and fully franked dividends to be paid next year.
This result wasn’t a great one but it does reflect a business that is adapting to industry conditions. The accommodation business continues to win work and generate decent returns and the long awaited turnaround of the RV business – currently draining profits from other divisions – is under way.
Fleetwood isn’t cheap by many conventional measures but we need to value the business as it will be in a few years rather than as it is today. The valuation we outlined a few months ago in Fleetwood starts to turn still holds. The share price is just below our Hold range but we wont quibble over a few cents. With the balance sheet repaired and cash flowing, we're ditching the speculative call and upgrading to BUY.
Note: The original version version of this article included a figure for free cash flow that was not adjusted for the proceeds from the sale of Osprey. It has been amended to take account of this.
Disclosure: The author owns shares in Fleetwood.