AV Jennings research Report
Established in 1932, AVJennings is an Australian based residential property developer with fully diversified development plots spread over Australia. All references are taken from the 2017 H1 report (which can be found here), unless otherwise stated.
AVJennings initially came to our attention due to its strong fundamental growth, excellent yield, and a share price below its net asset per share – the golden investment triangle.
Over the previous 5 years AVJennings has successfully grown the business year on year, with revenue compounding at 38.6%, operating income 289.4%, net income 244.1% and EPS 120.3%
|net income exc extra||40.91||34.39||18.78||-15.27||-29.83|
|diluted shares os||382.09||380.92||380.2||279.65||274.59|
|diluted eps exc extra||0.11||0.09||0.05||-0.05||-0.11|
|diluted eps inc extra||0.11||0.09||0.05||-0.05||-0.11|
|cash from operations||-28.31||-14.36||-1.68||0.45||-56.46|
|cash from investing||1.19||17.23||-1.01||0.82||-0.09|
|issuance of stock||-0.52||39.86||-0.74|
|issuance of debt||48.8||41.14||-4.31||-34.35||55.12|
|cash from financing||31.5||29.61||-4.83||5.52||48.86|
|free cash flow||-29.04||-14.66||-2.01||0.07||-57.1|
|net equity ps exc. goodwill||0.95||0.89||0.83||1.06||0.98|
What has made this growth more impressive is that it has all been organically generated, with no goodwill taken on, minimal intangibles and a manageable revenue to long term debt ratio of 2.5.
Short term interest bearing debt is 8.34m AUD
AVJennings focuses its core customer base on domestic buyers, with 99% of their business coming from within Australia. We view this as important as the Australian property market has been accused of being artificially inflated by Chinese overseas investors, and these speculators are not aligned building long term sustainable growth of property developers.
AV Jennings Research Report
AVJennings properties are aimed towards the lower end of the market, focusing on building affordable housing for first time buyers – their average product retails for 293k AUD. They only build in medium density locations where there is expected future growth of residents and do not build inner city high rise apartments
AV Jennings Research Report
Only 3% of completed housing remains unsold, so project pipeline will be an important factor for future growth. AVJ currently have 10,387 lots in their inventory with a recent 50% stake in 127 hectares of land in Queensland. 46% of their current inventory are forecast to be completed by the first half of 2018
At only a quarter of a billion market cap, AVJennings is not to be considered a large enough to effectively weather a large turndown in demand for housing across Australia. Their success hinges on their ability to meet interest payments and the continued growth in demand for affordable housing.
At 1.5% RBA interest rates are currently at almost historically low levels. Low interested rates are a double edged sword for capital intensive industries such as property development. Access to almost free cash will enable them to keep on purchasing land and developing on it, however any increase in the cost repayments could lead to concerns for an overleveraged AVJennings.
Management stipulate maintaining a gearing ratio within the range of 15%-35%, which they have been meeting although this level has been increasing, and their official statement is that gearing remains at a “comfortable” level.
According to data taken from the Economic Significance of Property to the Australian Market, Property Council of Australia, there is surplus demand for 200k homes in Australia, and growing concerns about housing affordability for first time buyers – although there is a risk of an oversupply of inner city apartments in Melbourne and Brisbane.
Additionally, the Australian population is forecast to grow 30% over by 2040 from 24m to over 31m
Share Price & Yield
Despite AVJennings tremendous growth, its share price has remained relatively flat since 2014.
We do not consider AVJennings to be a capital gains play, but rather a long term income provider. Managements states that their focus is on increasing dividends and maintaining a target dividend payout ratio of 40-50% of earnings. Using the dividend growth model and taking our required return of 10% and expected dividend growth of 6%, we value this company at $1.33 per share, well below the current share price of $0.64. AV Jennings Research Report
V1 = ($0.05 x 1.06 ) / (0.1- 0.06)
At a trailing yield of 5.42% after withholding tax, this yield is considered to be high
There are 8 Australian based residential real estate developers with a Robur Score of over 50. AVJennings ranks the highest with a score of 86% AV Jennings Research Report
Villa World comes in at a close second, and has very similar valuation, fundamental strength and market cap – we believe that AVJennings is considered to be cheaper due to its share price being below its NAVPS
|Company||Share Price (AUD)||NAVPS (AUD)|
Due to their similarities there are no hedging/diversifying benefits.
The cross-sectional analysis of the Australian residential real estate companies returns a surprising amount of developers – all at relatively cheap valuations, strong fundamentals and high yields. This could suggest that the market as a whole is undervalued, or that investors already perceive a turndown in the future. Since this is an income play we believe that a slowdown in the market may effect share prices further, but will not necessarily effect the company’s ability to pay dividends, as a nationwide downturn in the Australian economy would lead to interest rates remaining at low levels and potentially decrease LTD repayments.
There is additional foreign exchange risk, but due to the complexity of forecasting fx movements, this has not factored into the company analysis.