As we see in H&H’s article on the latest ABS Private Capital Expenditure, Australia appears to be marching towards the mining boom mk 2, spades in hand and singing “hi ho, hi ho”. In light of the coming boom, we’re going to take quick look at a company that may tap into the rivers of boom gold.
The Business
Fleetwood Corporation (FWD) commenced business in 1964 with its operations being based around the sale of caravans and caravan accessories. Fleetwood Corporation listed on the Australian Stock Exchange in 1987, at which time the group activities had been expanded to include the operation of caravan parks and the manufacture of park homes.
FWD is focused around three of Australia’s fastest growing industry sectors – Recreation, Retirement and Resources. On the resources side, it produces modular and transportable accomodation under the Fleetwood and BRB Modular banners. FWD supplies a lot of minign project accomodation in WA and has also picked up a business which services the public sector on the east coast.
On the recreation and retirement side FWD sells caravans, providing well known brands such as Coromal and Windsor for the ever-expanding legion of grey nomads. FWD also supplies caravan spare parts as well as canopy and alloy tray manufacturing for small vehicles.
The Financials
Fleetwood’s sound business is reflected in a high and sustained Return on Equity (ROE) ranging between 23% and 30% for the last 5 years. The vast majority of these profits are returned to shareholders, with an average of 6% of NPAT reinvested.
Even with a very low reinvestment ratio, FWD’s book value has steadily increased over the years and the business has grown organically. Net debt is very low with a very strong cash position. The balance sheet has very low intangibles of $0.04 per share compared to earnings of $1.18. However, constant capital raisings whilst paying out dividends does raise questions about capital management
The robustness of FWD’s business was proven during GFC when revenue, profit and ROE increased whilst other businesses struggled. Currently there is high demand for FWD’s products from both the recreational (retiring Baby Boomers) and resource (“donga” accommodation required in remote areas) sectors. Despite recent concerns about consumer sentiment, the mining boom and the looming retirement of the baby boomers should ensure demand in the medium to long term.
Return on Equity
Equity per Share
The Management
Management’s capability is reflected in an high, sustained ROE that weathered the GFC and volatile commodity markets. Internal ownership of the company is high (the Executive Director Grey Tate owns almost 12% of all shares), which may be the reason behind the very high dividend payout ratio. Nevertheless, book value has increased over time and the balance sheet is in an excellent condition.
Risk and Opportunity
- Sound and healthy balance sheet with high operating cashflow
- Business model services two growing sectors with a lot of potential
- High internal ownership by management
- Sensitive to commodity prices/resource sector volatility
- The “cautious consumer”may provide headwinds to revenue growth
Summary and Valuation
Fleetwood has an excellent business model, great financials and an enviable market position with a looming resources boom. Due to a lack of clear competitive advantage, Empire considers FWD a “Very Good” company.
Valuation
Using a forecast ROE range of 35%, dropping to 30% over the next five years, with a reinvestment ratio of 10% Empire values FWD at $9.56 per share.
Using a 15% Margin of Safety, Empire’s maximum buy price for FWD is $8.31 per share.
Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd), which has no interest in the businesses mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.