Building Up a Strong Start
Interim results from Brisbane-based property developer, Sunland (ASX:SDG) marked a strong start for the fiscal year with net profits surging fourfold due to completed projects reporting significant settlement numbers. We also take a look at an update on one of the company’s pipeline projects which has encountered some legal issues.
What’s New?
In our previous coverage of the property developer back on November (FAT-AUS-850) we took a look at the company’s FY2017 financial results which showed a solid 11.9% year-on-year growth in net profit while earnings per share (EPS) accelerated at a faster 19.1% pace to 22.4 cents, driven by ongoing share buybacks.
We also noted the company’s guidance estimates for FY18 earnings were between $27 and $30 million which we deemed somewhat conservative considering the sizable development portfolio. That said we do note the cyclicality of the company’s business model and agree with management’s cautious (i.e. counter-cyclical) approach to portfolio delivery and replenishment. In light of that, we retained our HOLD recommendation on the stock.
Since then, news-flow has been largely confined to the company’s interim results released in late February which will be the main focus of today’s report. Before that, we look at the latest updates on the company’s legal tussle with one of its developments in Brisbane.
The property, named “Grace on Coronation” is located at Lot 30 Coronation Drive, Toowong QLD. The 1.5-hectare site has been in the company’s portfolio since 2013 when it was bought from ABC radio for $20 million (then valued at $30 million). ABC had spent a few years trying to offload the property was after being declared free of radiation in 2010 – the site had sat unused since the ABC abandoned it after 17 of their female staff were diagnosed with breast cancer in 2006.
The site is pictured below:
Source: Google Maps, Brisbane City Council Website Application #A003953028
The company is currently facing some legal tussles since our last mention of this site (FAT-AUS-724) back in 2015 when a certain resident, Kate Peta Bell, filed a “Planning and Environment Court appeal” against its approval on grounds of the project exceeding the height limitations. This was eventually dismissed in May 2017.
However, Ms Bell later appealed, and the Court of Appeals recently overturned the earlier judgment in Mid-May this year. The project would’ve led to the building of 3 towers – 2 rising 24-storeys and a 27-storey tower – with over 558 units including parkland and ground floor retail space.
Additional pictures are below with the bottom one being the Architect’s impression of a finished site:
Source: Google Maps, Company Filings and Website
According to the company’s filing, the project should be worth $502 million. Given its favourable location at an attractive riverfront, we believe it unfortunate that such a project has been facing numerous roadblocks over the years. However, we are confident that the company can adjust the design to make it fit regulatory requirements as the project information has changed since our last coverage of the location (1,425 dwellings, project value in excess of $850 million).
Since then, Sunland hasn’t provided an official statement except that it’s having its lawyers review the judgment. Nevertheless, the delays won’t have a substantial impact as out of the company’s 21 ongoing projects, only 3 are still subject to development approval, including this site with at least 1 likely to finish by 2020.
With that out of the way, we look at the company’s interim results:
1H18 Results Review
Sunland (ASX:SDG) had a strong start to 2018 having reported a doubling of revenues year-on-year to $191.65 million from 238 settlements which compares well with last year’s $95.4 million from 204 settlements. According to Managing Director and son of the Founder, Sahba Abedian, the bulk of the company’s revenues were generated from the completion of its luxury Abian residential tower (pictured below) in Brisbane with 98% of units now settled.
Image Credit: Detail 3 (Architectural Firm)
Aside from the large volume of settlements in Abian, the company also reports steady settlements from residential assets at the Magnoli Residences, The Terraces, The Heights, and Ancora (QLD). Note that Marina Concourse, The Heights, The Terraces, and Shea Residences were still being sold, making sales visibility much easier to estimate in the near term. Finally, the recent launch of Arbour Residences in Queensland will also provide a nice revenue bump in the succeeding quarters.
We also expect this pace to pick up in the coming months as management has announced plans to launch up to 6 new projects in the 2H18 including the 44-storey 272 Hedges Avenue residential tower in Mermaid Beach with an expected value of $237 million (95 units) and The Hills Residences in Brisbane worth $47 million with 91 units. Both have recently received development approval.
Contracted sales (pre-selling) in 1H18, however, were lower year-on-year at $92.7 million covering 179 units compared to 1H17’s 281 units at $200 million. We believe this is likely due to timing issues as the company did disclose updated contracts in hand (as at 31 January 2018) totalled 408 units with a combined value of $328 million, marking a healthy revenue figure as units are delivered for settlement.
Source: 22 February 2018 Company Presentation
Moving on down to bottom-line figures, the significant bump in settlements lead to the Statutory Net Profit After Tax (NPAT) surging 312.3% year-on-year to $20.65 million which led to management confirming FY18 guidance of between $27 and $30 million. Again, we still believe these estimates to be somewhat too conservative in light of the accelerating revenues, project completions and new launches.
In fact, Mr Abedian has all but confirmed that 2H18 will lead to increased revenues based on his statement: “We remain in a mode of focused delivery as we enter the second half of the 2018 financial year, with 14 residential housing and multi-storey developments at various phases of the construction cycle.” Note that revenues are recognised upon delivery/settlement.
Going forward, we are keenly looking at how Sunland (ASX:SDG) will sustain its pipeline of projects as these are a significant lifeblood for property developers. In September last year, the company bought a 2.29-hectare site in Chapel Hill, 7 kilometres west of the Brisbane’s central business district for $5.5 million. As of the current filing, the site dubbed Kirkdale Residences has approval for 33 units with an estimated value of $31 million and is expected to be delivered by 2H19.
Source: 22 February 2018 Company Presentation
That aside, the company also has the capacity to acquire additional sites going forward. Net gearing has improved as evidenced by debt-to-assets now at 23% compared to last year’s 35% while the debt-to-equity ratio has reduced substantially to 35% from last year’s 60%. The balance sheet also supports this with $17.8 million in cash and $183.8 million in undrawn working capital.
Besides capacity, the company has a healthy pipeline of premium projects to be delivered over the course of the next 8 years and comprises approximately 5,138 units of residential housing, urban development, and multi-storey products and an emerging retail portfolio, with a total end value of $3.873 billion:
Source: 22 February 2018 Company Presentation
Turning to the daily chart, prices are currently in flirtation-mode with support at the 50-day moving average (red line) of $1.78. Should this indicator fail to lift prices, then downside support is sighted at the mid-September low of $1.59 as marked by the horizontal blue line. In order for the short-term technical outlook to improve, a sustained break above dynamic resistance indicated at the 200-day moving average (green line) of $1.75 is required. Should this occur, then a resumption of the medium-term uptrend would likely follow. Consequently, an eventual upward rotation in share price towards the late-August high of $1.88 (horizontal red line) would be deemed viable.
With reference to the monthly chart, overhead resistance is situated at the 38.2% Fibonacci retracement of $1.91. A sustained break above this level would bolster upward momentum and strengthen the long-term technical landscape. Should this scenario unfold, then the path is clear for a broader advance towards the March 2015 high of $2.09 (horizontal red line).
Summary
Overall, we are encouraged by Sunland’s First Half 2018 results considering the significant growth in revenues reported. We also believe that the company can steadily build up its settled projects with new site acquisitions furthering the capacity to do so ($17.8 million in cash and $183.8 million in undrawn working capital).
The company’s medium-term prospects are also attractive considering the relative affordability of property in South-East Queensland, including the Gold Coast, relative to Sydney and Melbourne’s ‘hot’ property markets.
The property development sector is a cyclical industry, but we remain favourably disposed to Sunland Group (ASX:SDG) given its conservative (i.e. counter-cyclical) approach to portfolio delivery and replenishment. Sunland (ASX:SDG) will remain held in the Fat Prophets Portfolio.
Disclosure: Sunland (ASX:SDG) is held with the Fat Prophets Concentrated Australasian Share, and Small & Mid-Cap Models.
