Sunland Group (SDG.ASX)

Friday 11th March 2016

Harvesting fruits in the second half

What’s new?

Sunland Group released its interim results late last month, reporting a 17.8 percent decline in revenue to $79.9 million on the back of a 38.5 per cent decline in property settlements. While the year-on-year decline in Sunland Group’s 1H16 settlements was due entirely to timing, the good news for shareholders is that the overall impact on earnings per share having been entirely offset by efficiency gains and higher property values, which resulted in above-average development margins, and the buy-back.

As at 31 December 2015, the portfolio comprised 6,000 land, housing and multi-storey products with a total end value of $3.7 billion. During the first half the Group continued to optimise its development portfolio with new site acquisitions in Sydney and Brisbane totalling $29 million for the period, followed by an additional $11 million invested during January and February 2016. These site acquisitions added 181 allotments to the portfolio with an estimated end value of $217 million.

To fund the Group’s growing development activities, management increased the use of its debt facilities and completed its first debt capital markets issue, raising $50 million in unsecured notes with a term of five years at a competitive coupon of 7.55 percent. The proceeds enhanced Sunland’s ability to fund its longer term medium-rise projects. As at 31 December 2015, Sunland Group had $15.9 million in cash, $82.0 million in undrawn working capital lines, and net debt as a percentage of total assets of 35 percent.

Sunland Group declared a fully franked interim dividend of three cents per share, to be paid on 23 March 2016, an increase of one cent compared with the previous year. Management expect to maintain a dividend pay-out ratio of 40-50 percent of net operating earnings. To further highlight Sunland Group’s strong capital position and favourable near-term outlook, the company recently bought-back 15.6 million shares at an average 23 percent discount to the company’s net tangible assets.

Outlook

Management has indicated that it expects Sunland Group to settle 530 sales and report a net profit after tax in the range of $25 million to $29 million for the full financial year, compared to $30.1 million in FY15. While this implies a significant weighting to 2H16, this is not unusual with property developers, with management having indicated that the current period will benefit from contributions from six new projects. As at 31 December 2015, the Group has 855 contracts in hand with a value of $663 million.

Price

Sunland Group’s share price is currently trading at a 30 percent discount to reported net tangible assets, with a price to earnings ratio of 9 times FY16 earnings and a dividend yield of 4.4 percent. While these represent attractive metrics, particularly given Sunland Group’s overweight exposure to south-east Queensland property, the company’s fundamentals are supported by technical indicators. In particular, we note that a potential ‘higher low’ is in formation, which could be a precursor to a break above resistance located at $1.70.

Worth buying?

We expect Sunland Group’s share price to outperform the broader market on a 6 – 18 month view. This is view is based on Sunland Group’s current price metrics, recent financial results, earnings guidance for 2H16, and the company’s project pipeline and overweight exposure to south-east Queensland. While noting that Sunland Group’s earnings can be lumpy and thus volatile, we believe the company has its bases loaded at a time when demand for property in south-east Queensland is approaching a cyclical upswing.

James Lennon is a Senior Analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

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

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