Sunland: Interim result 2013
Recommendation
Sunland’s development revenue rose 30% to $77.4m in the half-year ended 31 December and net profit increased from practically zero to $8.4m (although the latter was boosted by a $6.2m tax benefit related to the recent sale of the Palazzo Versace Hotel).
From earnings per share of 4.4 cents, a special 2.0 cent dividend was declared (fully franked, ex date 4 March) to return a small portion of the proceeds from the recent $68.5m sale of the Palazzo Versace Hotel.
This result represents welcome progress of the investment case we originally set out in Pouncing on downtrodden developers on 22 Jan 10 (Long Term Buy – $0.78): that Sunland’s ill-fated Dubai expansion was weighing temporarily on shareholders' minds, as were broader concerns about the property industry. Over time we expected Sunland to leave Dubai and renew its focus on the Australian business, improving profits and enabling the resumption of dividends. With this half-year result Sunland appears headed in the right direction.
Since 2010 it has extricated itself from Dubai, and in the process gained complete ownership of the Palazzo Versace Hotel (it previously owned 50%). It sold that asset in 2012 for $68.5m, close to book value.
Meanwhile its development business has ticked along and, despite sales tallying only 111 this half, down from 219 in the previous period, management has flagged an improved second half with revenue expected to reach $100m. The company has also bought new sites at Point Cook in Melbourne and Kellyville in Sydney, for $37.8m combined, which will help keep the development pipeline stocked.
Buyback adds value
Reasonable operational performance has been coupled with savvy capital management. An ongoing buyback has reduced shares on issue from 320m in 2009 to 190m today. As the shares have been trading at a large discount to asset backing this has added tremendous value for shareholders. Indeed, whilst other developers have faced shrinking net tangible assets (NTA), Sunland has increased its NTA per share by 4% to $1.86 over the half. The buyback continues, with ambitious plans to reduce the share count by a further 40m shares, which will further boost NTA, although as the stock price rises this become a less attractive use of capital.
This activity means Sunland no longer possesses net cash and debt will likely increase further as the buyback and new site purchases continue in 2013. Still, with net debt to equity hovering around 5% we remain comfortable, but watchful. Little was also said about the outstanding legal issues relating to its foray into Dubai, but we expect the group to be able to meet any legal costs that may arise.
Sunland has returned 62% since our original recommendation. Despite that, the current share price remains at a 33% discount to NTA. The share price is unchanged since we increased our recommendation guide prices on 4 Feb 13 (Hold – $1.25), as is our recommendation. HOLD.