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Edited Transcript of CWP.AX earnings conference call or presentation 28-Aug-19 1:00am GMT

Full Year 2019 Cedar Woods Properties Ltd Earnings Call

West Perth, Western Australia Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Cedar Woods Properties Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 1:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Leon M. Hanrahan

Cedar Woods Properties Limited - CFO

* Nathan John Blackburne

Cedar Woods Properties Limited - MD & Executive Director


Conference Call Participants


* Sky Walker

Alder & Partners Private Wealth Management - Investment Analyst




Operator [1]


Thank you for standing by, and welcome to the Cedar Woods Properties Limited FY '19 Full Year Results Presentation. (Operator Instructions)

I would now like to hand the conference over to Mr. Nathan Blackburne, Managing Director. Please go ahead.


Nathan John Blackburne, Cedar Woods Properties Limited - MD & Executive Director [2]


Good morning, and welcome to the presentation of Cedar Woods Properties financial results for the 2019 full year. I'm Nathan Blackburne, Cedar Woods' Managing Director, and with me is Leon Hanrahan, our CFO.

In terms of today's agenda, I'll firstly provide an overview of our purpose, vision and strategy. I'll then hand over to Leon to take us through the financial highlights for the year, then I'll provide our presentation on market conditions in the residential property sector before taking you through some of our projects across the country. We'll then wrap up with our expectations for the business going forward.

Our purpose and vision inform every decision we make and there is a great clarity and focus throughout the organization on them. Our purpose is to create long-term value for our shareholders through the development of vibrant communities. We are proud to be a leading national property developer of residential communities and commercial projects, and we enjoy fulfilling our vision of becoming the best Australian property company renowned for performance and quality.

Cedar Woods is known for taking on large-scale projects with great locational attributes then adding value through planning approvals, design, delivery and sales. We have many happy customers, and our recent case study of this was the settlement and handover of our first townhouses at Glenside in South Australia. We exceeded their expectations with the townhouses that we handed over to them and are now talking highly of their experience with our business. As a result, Cedar Woods has built a reputation as a high-performing customer-focused and diversified property company with a track record of delivering on promises and always acting with integrity.

Our strategy is to grow and develop our national project portfolio diversified by geography, product type and price point so that it continues to hold broad customer appeal and performs well in a range of market conditions. The strategy is proving successful with the strong and consistent financial returns that we've been able to deliver. We have multiple product types in 4 states and different price points that are appealing to a variety of buyer profiles.

When I started in the role 2 years ago, we identified 4 strategic priority areas to aid the company in achieving its objectives. Good progress has been achieved on each of these which I will briefly run through.

The strength of our culture and the caliber of our talent is an area I started working on in FY '17. We have a really high-spirited workplace, and our strong culture generally is serving as a form of advantage for our business. Staff surveys demonstrate the high levels of engagement and role satisfaction we have throughout the business.

In terms of operational excellence, we have worked diligently to make the business the best it can be operationally. Our digital transformation efforts have made material gains with a more mobile workforce, a new risk management framework, simplified systems and a new integrated financial system, the implementation of which is near complete. We also have a strong safety record.

On financial strength, we have improved our capacity for growth with the recent extension of our corporate finance facility which has seen the introduction of NAB and a portion of the debt having a maturity date of 5 years. And finally, on earnings growth, we've achieved a 13% increase in EPS and acquired 3 sites at a favorable point in the cycle.

A hallmark of our businesses our track record of consistent profitability and dividends. The blue and green bars represent our growing profit, and the black line shows our growing dividends from 2011. Since inception, we have always made a profit and always paid a dividend. It is a testament to our staff and the quality of our portfolio that we have achieved this in what can be a cyclical industry. Our growing profits have been achieved at a time when we have faced demand challenges around the country, especially in Perth, where a good portion of our portfolio resides.

I'll now hand over to Leon who will present the FY '19 financial highlights.


Leon M. Hanrahan, Cedar Woods Properties Limited - CFO [3]


Thanks, Nathan. I'll now take you through the financial highlights for 2019.

We are happy to report that we delivered on our guidance with a strong uplift in earnings for 2019, that is we reported 14% increase in net profit after tax with a profit of $48.6 million. This was achieved from revenue of $375.9 million, which was up 58%. The significant increase in revenue resulted from a combination of increased volume of settlements, a larger portion of higher value built form settlements as well as the settlement of the Target Head Office building. Gross margin did compress as a result of this change in product mix, however remains strong at 29%.

The result generated earnings per share of $0.609.

In line with our dividend policy, which is to pay approximately 50% of full year net profit after tax in dividends, the Board declared a final dividend of $0.135 per share taking the total FY '19 dividends to a record $0.315.

Whilst we are pleased to have achieved a very strong return on equity of 12.9%, total shareholder return of 5.3% was muted by negative sentiment hanging over property stocks in 2019. Pleasingly, this sentiment has improved somewhat since year-end, and we have since experienced a reasonable increase in our share price.

We start financial year 2020 on a great footing, reporting modest gearing with net bank debt-to-equity at 28% and more than $330 million in presale contracts on hand, this being up $10 million from the $320 million that we recorded at the same time last year. Approximately 2/3 of these presales are expected to settle in financial year 2020.

We continue to operate a strong modestly geared balance sheet in accordance with our financial strength strategic priority. Total assets at 30 June of $571.7 million are down $29.8 million after increasing close to $100 million in the prior year, and net assets and equity of $376.5 million are up $23.3 million or 6.6%. Net bank debt of $105.3 million ended the year lower resulting in net bank debt-to-equity of 28%, and we continue to operate comfortably within our target gearing range of 20% to 75%.

The completion of 2 office buildings in 2019 enabled the paydown of debt and the retirement of the related project facilities, leaving $235 million in finance facilities available at year-end that offer more than $100 million in undrawn facility headroom. This capacity will support the business in funding acquisitions and the development of the existing portfolio. And as Nathan mentioned earlier, we are now supported by 3 major banks, offering access to additional finance as the business requires it. Strong interest cover continues to be achieved with interest cover of 8.6x in 2019.

I'll now hand back to Nathan to provide you an overview of our portfolio.


Nathan John Blackburne, Cedar Woods Properties Limited - MD & Executive Director [4]


Now for an overview of our portfolio, followed by some comments on key projects. We have 9,600-plus lots, dwellings or units across 34 projects, and we are now in 4 states. FY '19 was the first time the company has generated revenue from each state, which was an important milestone for us given the geographic diversification strategy we embarked upon several years back.

We are somewhat unique in the diversity of our product with our offering including land estates, townhouses, apartments and commercial projects. One other differentiator is the location of our projects which are commonly in areas of high amenity, low supply and with several being next to train stations. Our projects are positioned as quality developments within their respective markets, and this approach has served our business well with well-designed projects performing better when tough conditions prevail.

These charts further demonstrate how our diversification strategy has played out. The chart on the left shows the 4 states that we achieved settlements from in FY '19 with WA, then VIC playing the dominant roles. Queensland and SA contributions will increase as new projects in those states come online over FY '21 and beyond.

The chart on the right shows the mix of product, with residential land still being dominant but with townhouses, apartments and commercial playing an increasing role.

I'll now briefly discuss our views on current market conditions. Australia's housing market is driven by several factors, with population growth and economic conditions being 2 of the important drivers. In each of the states that we operate in, the population is growing and the economies are performing well. The outlook for economic growth is robust with WA, Queensland and VIC all anticipating between 2.75% and 3.5% gross state product growth in FY '20. Unemployment is fairly stable in a range of 4.8% to 6.9%, but with South Australia numbers having climbed a bit.

So the fundamental sector drivers are supportive, but the residential market is experiencing challenging market conditions at the moment.

We experienced challenging selling conditions across all states throughout FY '19 with tight housing finance the main factor hindering sales. Latest data though shows that we are likely near the bottom of this property cycle. Prices appear to be stabilizing. CoreLogic has reported housing values in 5 of the 8 capital cities recorded modest rises in values in July this year. Auction clearance rates in Sydney and Melbourne have been high in recent months, and there's a notable change in buyer sentiment and increased loan application activity.

The turnaround in sentiment is attributable to several factors: 2 interest rate cuts pushing mortgage rates to record lows and the prospect of further falls; APRA'S loosening of the mortgage stress tests; the best housing affordability nationally since 2016; tax cuts for some income segments; and increased confidence after the federal election, which averted negative gearing and capital gains tax changes.

Here are some statistics from the Housing Industry Association which were published in August. It shows the trend and outlook for new dwelling starts in the 4 states that we operate in. The darker bars in each graph are for houses and the lighter bars are for apartments.

For WA and South Australia, you can see that an uplift in housing starts is expected in both FY '20 and FY '21. Apartment numbers, too, are expected to grow but more modestly. Queensland is expected to show further declines in FY '20 but rebounding with good growth in FY '21. For Victoria, declining volumes are still expected for this year and next.

I'll now take you through highlights in each of our states, starting with WA, where we have 16 residential projects. The portfolio has around 5,900 lots, and these are across projects that are in different stages of their life cycle. While conditions remain subdued, sales continued to be achieved, and we are expecting improvements over FY '20. Cedar Woods has strong leverage to WA, and if there is an upturn in conditions here, which we expect, then we have plenty of stock ready to go to meet that demand.

In FY '19, we acquired 3 development sites, one in Subiaco and 2 adjacent to existing projects. This slide shows 2 of our strongest-performing WA projects which made good contributions to settlement figures in FY '19. Ariella, 20 kilometers from Perth, is currently the best-selling project in our national portfolio appealing to a mix of first home buyers and upgraders. We also managed to modestly increase prices over the year for this project.

Bushmead is an 8-year project comprising more than 950 lots and is generating strong margins. Sales are steady at this estate, it presents very well, and our customers are very happy with the quality of the street scapes and the open space that we have delivered.

In Victoria, we have 14 projects, 8 of which are in Williams Landing, and range from land subdivisions to townhouses, apartments and commercial projects. One important factor that underpins our Victorian projects is that they are in high-performing locations, with little competition and which have strong appeal to the owner/occupier market. This enables them to be more resilient in easing market conditions. And whilst not entirely insulated, they are well placed to outperform the market.

At Jackson Green in Clayton South, 20 kilometers from the CBD, several townhouse stages and the Gardenia Apartments project was settled in FY '19. The project is looking great, the customers are happy, and whilst sales slowed in FY '19, they do remain steady. On completion, there will be around 500 dwellings, and it's great -- and it's a great example of the outcomes that can be achieved on infill sites.

The first settlements at St A were achieved in FY '19. And again, while sales have slowed in FY '19, the product we are developing here continues to be met with demand. On completion, there will be around 260 townhouses at this development.

We still have a long pipeline of developments to come at Williams Landing, with the town center invigorated with new developments and a diverse mix of land, townhouses, apartments and commercial projects. There are many sites undeveloped in the town center which we will progressively work through over the next 10-plus years.

FY '19 saw the Target headquarters building completed ahead of schedule, and it's the first of a pipeline of office projects within Williams Landing. A further 2 office developments are underway, both of which are substantially presold and under construction. The project is really starting to feel like a small city, and we are proud of the outcomes to date.

Moving to Queensland. We have 2 projects located relatively close to the Brisbane CBD. Ellendale, just 12 kilometers away, continues to progress with several stages completed in the year. Sales did slow considerably but we are hopeful that will pick up in FY '19.

Wooloowin is a site that we purchased and -- which is 6 kilometers north of the Brisbane CBD that will deliver a mix of townhouses and apartments. We are in the process of refining the designs for that project, with sales expected to start later in the year.

In SA, we have 2 projects which have been performing well. Glenside is a 17-hectare project and only 3 kilometers from the Adelaide CBD in a sought-after suburb. It's a large-scale project that will deliver around 1,000 dwellings and has been set up as a high-end housing projects.

In FY '19, we settled our first townhouses, and the quality of the product has been met with a really positive response from the buyers there. With good presales on apartments, we commenced construction of the first apartment building, and that construction has been progressing well.

Our project in Port Adelaide, Fletcher’s Slip, is located just 14 kilometers from the CBD and benefits from an adjacent train station, being close to the beach and near the location where the federal government's new submarine fleet will be built. The project was launched in February with very strong interest. And we have good presales with site works currently underway. Fletcher’s Slip will produce around 500 dwellings, most of which are townhouses.

Now I wanted to comment on the outlook. Sentiment is improving and gains are expected in some markets over the FY '20 financial year. Further, low interest rates, continuing population growth and government incentives are all supporting demand. Moderately lower earnings are expected in FY '20 due to soft market conditions. With new projects coming online and improving conditions, we are expecting growth in earnings over the medium term, though.

We have a long pipeline of quality projects, and our development program is on track. Our projects are in high-performing locations with low competition and accordingly are performing relatively well. We've made operational enhancements to culture and systems to provide a competitive advantage, and the results are becoming evident within our business.

Our outlook is underpinned by presales of $330 million, which is up $10 million on the same time last year. And this demonstrates the quality of the portfolio that we have. The leverage that we have to WA provides a distinct advantage, and an upturn in the economy here will further support growth. And finally, we are currently assessing a number of acquisitions in favorable buying conditions which also support earnings growth in future years.

Our presentation concludes with a summary of the investment proposition that Cedar Woods offers. We have a stable and experienced Board and management that has proven its ability to differentiate and deliver. We have a track record of consistent profits and dividends with a strong fully franked dividend yield. We are well positioned to benefit from a WA turnaround, and we do expect that to occur. Finally, our diversification strategy is a key point of difference and one that is proving successful.

That concludes the presentation, and we are now happy to answer any questions that you may have.


Questions and Answers


Operator [1]


(Operator Instructions) Your first question today comes from Sky Walker with Alder & Partners Private Wealth Management.


Sky Walker, Alder & Partners Private Wealth Management - Investment Analyst [2]


Great result. Congratulations. Just wondering if you can provide a bit more comment on acquisitions. It seems that -- maybe you could -- what's the generation opportunity here to build your portfolio. So how excited are you about the outlook for some really sort of marquee projects to come out of woodwork?


Nathan John Blackburne, Cedar Woods Properties Limited - MD & Executive Director [3]


Thanks for the question, Sky. It's Nathan here. So firstly, since I took on the role, we've taken on some systems- and culture-related improvement projects, and we've made great gains with those and are very happy with how the business sits operationally at the moment. This has enabled us to now focus more on growth, and that's exactly what we're doing. So the executive team, the acquisition resources throughout the business is spending a much greater proportion of time assessing -- sorry, identifying and assessing opportunities.

It's fair to say that the small- and medium-sized developers out there in the community are finding it more difficult to access development finance. With the considerable headroom we have in our debt facility and the strong position that we find ourselves in financially, more generally speaking, we are tending to capitalize on those current favorable buying conditions. We're looking in WA, we're looking in Queensland, we're looking in Victoria, and we are seeing a reasonable number of opportunities that are on the market and that we're creating. And we're actively assessing those. It's difficult to say when and if they will convert, but there's certainly a lot of determination within the business to get some conversion.


Sky Walker, Alder & Partners Private Wealth Management - Investment Analyst [4]


Okay. Are you seeing a step-up in the quality of the opportunities?


Nathan John Blackburne, Cedar Woods Properties Limited - MD & Executive Director [5]


It's fair to say that yes, that there's an increased number of superior opportunities than we might have seen 1 or 2 years ago.


Sky Walker, Alder & Partners Private Wealth Management - Investment Analyst [6]


Okay. And just on your comments around WA, it seems like you're getting more bullish about the outlook. Can you provide a little bit more detail on what you're seeing in your individual projects and anything at this stage that translate to presales and settlements?


Nathan John Blackburne, Cedar Woods Properties Limited - MD & Executive Director [7]


The improvement that we're seeing, Sky, is more as a result of the macro factors. And it's not playing out in more than just an improvement inquiry on the ground.

So with the material factors that have changed in our sector -- affecting our sector in the past 3 or 4 months, we are seeing buyers being much more positive about buying a property, and they still remain cautious. If we talk about the people that we're seeing in our sales center, their behavior is still cautious. But their inclination to buy, their intention to buy has seen a bit of a jump.

Right now, they are still finding it difficult to secure a finance, and we expect though that access to finance to remain difficult over the next few months. But we are aware that the banks are starting to loosen up, and that will start to flow through to the ability of our customers to get financed during this financial year.


Operator [8]


(Operator Instructions) There are no further questions at this time. That does conclude our conference for today.

Thank you for your participation. You may now disconnect.