Fat Prophets Hot Stock - Sunland Group

Sunday 26th February 2017

Riding the upswing

What’s new?

Property developer Sunland Group has recently affirmed the company is on track to meet FY17 guidance of $35 million in NPAT. This coincided with the announcement of an on-market share buyback of up to 10 percent of the company’s shares, which comes on top of previous buybacks that has seen the number of shares outstanding halve and underpinning an improvement in both earnings and Net Tangible Assets (NTA) per share.

While median house prices have risen to eyewatering levels relative to median incomes in many major cities such as Melbourne, Sydney, Auckland and Vancouver, this is yet to play out in Southeast Queensland. Between 2009 – 2015 median house prices rose by only 17 percent in Brisbane compared to a 63 percent rise in Sydney. We consider this to not only offer greater room for price appreciation in Queensland property compared to its southern state neighbours, but perhaps more importantly for Sunland is that it also reduces the downside risk in case the property market were to endure a correction.

Approximately 88 percent of Sunland’s total FY16 development portfolio is in Queensland, with the bulk of this being in the Gold Coast. Following the GFC property prices in the Gold Coast dropped from 2009 – 2013 before finding its feet in 2013 – 2015 and has returned to growth. This should be positive for Sunland group, and we expect that the 2018 Commonwealth games and the growing number of inbound tourists coming to Australia to be supportive of Gold Coast property prices, with some experts predicting double-digit price growth in 2017.

In Brisbane, median house prices are over 70 percent less than in Sydney, while the difference in incomes is only 17 percent. This has been attracting property investors to the region, but while the Brisbane housing market is expected to grow steadily, apartment prices are projected to fall this year due to the number of new developments which is expected to outpace growth in demand.

Tourism in Australia is booming, with annualised tourism exports now $47 billion, overtaking the $41 billion brought in by coal exports. The number of short-term arrivals is now rising at 10 percent a year, whereas the number of people heading overseas has halved to 3 percent. Growth out of China has been particularly impressive, with a record 1.2 million Chinese tourists visiting Australia in 2016.

Airlines are responding by opening up new routes to Asia and the Queensland government is attempting to ride this wave in tourism by investing $90 million in a Queensland tourism campaign. With the Great Barrier Reef, sunshine & beaches and numerous theme and adventure parks on offer, we expect growing inbound tourist numbers to be positive for Queensland real estate and Sunland group.

Outlook

Sunland has recently reaffirmed guidance of $35 million net profit in FY17, an increase of 11 percent on the previous year’s $31.5 million. Hitting this target will pave the way for a fully franked 10 cent per share dividend (8c in FY16), which is in the mid-range of the groups payout ratio of 40-50 percent of net operating earnings.

Price

Sunland Group is currently trading at a 32 percent discount to NTA on a FY17 PE of 7.8 with a dividend yield of 5.3 percent. Complementing these positive investment fundamentals is Sunland Group’s technical set-up, with overhead resistance situated at the 38.2% Fibonacci retracement of $1.91. A sustained break above this level would bolster upward momentum and likely clear the path for a broader advance towards the March 2015 high of $2.09.

Worth buying?

Sunland Group recently reaffirmed FY17 guidance of $35 million in NPAT. This coincided with the announcement of an on-market share buyback of up to 10 percent of the company’s shares, with previous buybacks seeing the number of shares outstanding halve and underpinning an improvement in both earnings and Net Tangible Assets per share.

We continue to remain favourably disposed to the Queensland property market, where Sunland has the bulk of its portfolio. We see as Queensland property as mid-way through a cyclical recovery, which compares favourably with the arguably overheated Sydney and Melbourne property markets.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets.

Disclosure: Sunland is held with the Fat Prophets Concentrated Australasian Share, and Small & Mid-Cap Models.

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