Forrester Kurts in fine form
Recommendation
We'd like to say that this great performance, in such a short period of time, is down to our supreme analytical skills and superior judgement. Unfortunately, we have to admit that we've enjoyed a large slice of luck.
The fact is that when we recommend a stock we don't try to guess where the share price will be in six months time. We concern ourselves with the returns an investor with a sensible time frame, say two or more years, might reasonably expect and the risks attached to that investment.
Quick recap
Shortly, we'll explain what sort of returns investors who buy around current levels might receive but first a quick recap of what this company does.
FKP's primary business is property development and construction. Being Queensland-based, that's where most of the revenue comes from but there are operations in NSW as well. The company is also involved in the retirement industry, owning and operating 20 retirement villages with around 2,300 units across the country.
These units provide a steady, growing stream of cash. This is a capital-intensive business but the company's staged development approach reduces the burden somewhat. Last year this division contributed a record pre-tax profit of over $6.5m, up 27% on the previous year and this figure is set to grow.
Space limitations prevent us from explaining the 'deferred management fees' FKP earns from the retirement village but those looking at this company should read our review in issue 84 (use the search facility on the website) and note 1 to the financial report. It explains how this revenue is booked (based on actuarial forecasts not actual cashflows).
Last year's result was worse than the accounting bottom line shows. While after-tax profit was down 30% to $12m, pre-tax profit fell a whopping 52% to $11.3m. This may strike astute readers as rather strange. After-tax profit is actually higher than pre-tax profit. How so?
Tax benefit
The company actually recorded a tax benefit of $742,000 versus an expense of $6.2m in the 2000 year.
The glossy part of the annual report tells you that this 'is largely as a result' of recouping tax losses not previously brought to account. The accounts reveal a slightly different reality.
Note 5a to the accounts shows that the main culprit is a difference between accounting capital profits and taxable capital profits.
This would be a result of the structure of the sale of the Mincom Central building, involving an upfront payment of $78m and another $12m in staggered payments until 2005. This doesn't concern us but understand that these tax benefits are a one-off.
So, you may notice that we're sounding a little more cautious than last time we reviewed this stock. That's because the margin of safety is much less at current price levels than it was at 81 cents. But there's still plenty to be excited about.
The strengthening property market in south-east Queensland combined with the government's first home owners grant should underpin good profit growth for the 2002 year. But what about the pricing?
The stock continues to offer a good dividend yield of 8.2% and still trades at a discount to its net tangible assets (NTA) of $1.30 per share.
At some stage we'd expect the stock to trade at NTA. If that takes, say, three years you'd be looking at an annual return of over 15%, including dividends. That strikes us as a good deal despite the increasing share price risk, which is why we're reiterating our BUY recommendation.