Finbar Group Ltd AUSTRALIAN EQUITIES RESEARCH (FRI $1.30) Buy Analyst: Gavin Allen Date: 19th February 2015 Finbar Group Half Year Result Price Target: $1.83/sh Investment Case: FRI has reported a first half result in line with our expectations at $11m NPAT. We are looking for a stronger second half of $17m on the way to $28m full year, our unchanged full year forecast. The ultimate result will be a function of sales rates on two large projects at Toccata and Subi Stand. In 2016 and beyond the pipeline supports a return to growth, with applicable presales robust to date. That said, sentiment is weak and the media vocal in relation to potential supply, notwithstanding that not all supply will get built. As a consequence FRI lacks obvious catalysts. In our view however FRI, as low cost producer will retain market share through the cycle, and is supported by a current 7% yield. Buy maintained. Key Points: • FRI has reported a first half NPAT of $11m. We were looking for $10m and we have no reason to amend our current full year NPAT forecast looking for $28m. • The ultimate result will be a function of sales rates on two large projects at Subi Stand and Toccata. These projects will see construction complete in the next few months after which sales activity will recommence in earnest. • In the meantime sales activity in off the plan product, which will impact 2016 and 2017, has been robust, and FRI now has pre-sales contracts worth $428m, a healthy position. • The business has cash of $49m with a further $20m to come after settlement of the Gateway building in Victoria Park in March 2015. • As a consequence of the sale of this building our forecast rental income for 2016 decreases and our forecasts for 2016 reduce from $33.9m to $30.9m. The balance sheet improves however by the $20m in cash realised and FRI can generate a return on this capital in future years beyond the income lost. • In 2016, we see resumed growth off a lower base as remaining Toccata and Subi Strand product is settled together with new projects i) Norwood, ii) Springs Arbor North, iii) Unison in Maylands and iiii) Linq in Northbridge. • As always, FRI is subject to construction and settlement timetables which may impact earnings half over half and even year over year, and this may well be a feature of 2015 and 2016. • That said, notwithstanding some recent negative press and speculation around apartment supply and a cooling WA economy, we continue to believe: 1. Perth is fundamentally under supplied in terms of apartment choice compared to many other cities of similar size, • 2. Not all the current supply on offer “off the plan” will get built, 3. Apartment living will become an increasingly accepted housing alternative in Perth as the city continues to grow and 4. As low cost producer with proven delivery capability, FRI is well placed to maintain its healthy market share. Year end 30 June Share Price 1.30 A$/sh Price Target (PER) 1.83 A$/sh Valuation (DCF) 1.83 A$/sh WACC10.6% Terminal Growth 2.0% Shares on issue 228.4 m, diluted Market Capitalisation 296.9 A$m Enterprise Value 314.4 A$m Debt (June 2014) 78.4 A$m Cash (June 2014) 61.0 A$m Key Financials 2014a 2015f 2016f Revenue (A$m) 273.1 184.9 214.8 EBITDA (A$m) 59.1 40.1 44.2 EBIT (A$m) 58.9 40.0 44.1 Reported NPAT (A$m) 36.5 28.0 30.9 Normalised NPAT (A$m) 37.6 28.0 30.9 Gross Cashflow (A$m) 41.7 27.7 31.0 Capex (A$m) 2.2 -0.5 -0.5 Op. Free Cashflow (A$m) 99.6 -40.8 1.3 Revenue Growth (%) 111% -33% 19% EBITDA Growth (%) 37% -32% 10% Norm. NPAT Growth (%) 28% -25% 10% Normalised EPS (Ac) 17.01 12.28 13.52 Norm. EPS growth (%) 25% -28% 10% PER (x) 7.6 10.6 9.6 EV:EBITDA (x) 5.3 7.8 7.1 EV:EBIT (x) 5.3 7.9 7.1 DPS (Ac) 10.00 10.00 10.00 Dividend Yield (%) 7.7% 7.7% 7.7% Net Cash (A$m) -17.5 -22.0 -34.5 Net Debt:Equity (%) 7% 9% 13% Interest Cover (x) 294.6 na na Share Price Chart $/sh $1.90 FRI 12 Month Price History $1.60 $1.30 $1.00 Feb-14 May-14 Aug-14 Nov-14 Disclosure From time to time Euroz may act as the buy-back broker with respect to an on-market buy-back that is being conducted by the company that is the subject of this research report. During the period when such a buy-back is being conducted, if you wish to sell and speak to your Euroz adviser about this issue, you will be informed that that Euroz is acting for the company that is undertaking the buy-back and that your adviser is therefore unable to give you advice in respect of the proposed sale. In the meantime the stock yields 7% fully franked. Buy maintained. WA Industrials Book - March 2015 All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document. Finbar Group Ltd AUSTRALIAN EQUITIES RESEARCH (FRI $1.30) Buy Analyst: Gavin Allen Analysis: We provide below our analysis of the pipeline of projects available to FRI. Fri share of revenues Construction commenced/complete 2014 2015 2016 2017 2018 ($m) ($m) ($m) ($m) ($m) 31 - - - - Pelago West 3 4 4 5 - Knightsgate 9 - - - - St Marks 79 - - - - AU 46 3 - - - Ecco 27 3 - - - The Springs - 50 - - - Pelago East 62 3 10 18 25 Mill Point Road 2 7 - - - Subiaco - 65 18 - - Toccata - 40 13 - - Norwood - - 18 - - Concerto and Harmony - - - 84 20 Maylands - - 42 23 23 The Springs (Arbor North) - - 39 - - Dianella - - - - 34 The Springs (South and 1014) - - - 27 38 West Perth - - - - 63 Northbridge (James street) - - 65 - - West Leederville - - - 43 - South Perth (96 Mill Pt road) - - - 50 - South Perth Civic Triangle - - - - 150 Belmont (GE Highway) - - - 30 - 63 Adelaide Terrace - - - - 38 257 174 208 278 388 Adagio Construction not yet commenced Revenue forecast Revenues per the above will not equate to reported revenues due to equity accounted developments. This does not impact our view of reported profits We note: • We see reduced earnings in 2015 a consequence of our conservative sales assumptions on the Subiaco and Toccata projects. • We see further growth in 2016 as three new projects, i) Norwood, ii) the Springs Arbor North, iii) the Linq project in Northbridge and iiii) Unison project in Maylands complete and settle. Presales on these projects have been steady and construction on all three have commenced or will do so shortly. • In 2017 the massive Concerto project (currently under construction) completes and in general the pipeline of available opportunities is robust and growing. WA Industrials Book - March 2015 All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document. Finbar Group Ltd AUSTRALIAN EQUITIES RESEARCH (FRI $1.30) Buy Analyst: Gavin Allen Headwinds • It is clear the number of new apartment buildings available for investors to consider has increased. • Whether these opportunities are ultimately built is a function of achieving the necessary presales to enable the project to be banked. • In addition, as the mining boom unwinds, rent rates are decreasing and this may impact investor appetite. • Finally, the media is talking up all of the above which does not help sentiment generally. Mitigation • We continue to believe that the market will sensibly address the supply and demand equation, as the nature of presales required to finance a project acts as a supply brake of sorts over the medium term. • This is not to suggest short term peaks in supply may not occur from time to time, particularly if a number of marginal projects scape over the presales threshold at the same time potentially resulting in an excess of supply upon completion. • When this happens new supply doesn’t receive presales, the excess supply is eventually cleaned out, and the cycle resumes. Long term • Finbar continues to be one of the low cost producers in the WA market with a proven track record of delivery. • We also continue to believe Finbar product will see a sustained share of the available demand, demand we believe will increase over the medium to long term as WA residents look for alternative living arrangements in a sprawling city. The case precedent for this in other growing cities in clear. • Short term demand will likely moderate as rents reduce and investors potentially slow however ultimately we see a city continuing to grow over time that is fundamentally underserviced in terms of apartment living. Investment Thesis • Investment sentiment as it pertains to WA is clearly poor as the mining construction cycle ends and low commodities prices create job and economic uncertainty. • Finbar is not immune from this and we see no immediate catalysts, particularly as, Finbar has been unable to be definitive in terms of 2015 earnings with the half year result. This is because timing on the sale of remaining product at Subiaco and Toccata is unknown. • That said, we see pipeline the of opportunity as sufficiently robust to maintain and ultimately increase the dividend even as earnings fluctuate somewhat with timing of projects and FRI currently yields 7.7% fully franked. • We see this as a floor, and while catalysts are skinny and consequently FRI may do some further time over the next 6 months at current levels, we continue to like the business, its track record and management. • In the meantime the stock trades at 10.6x our reduced 2015 forecasts, hardly demanding. • We maintain our Buy recommendation with a long term view, despite some potential short term earnings fluidity. WA Industrials Book - March 2015 All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. Refer to full disclaimer at the end of this document. Finbar Group Ltd AUSTRALIAN EQUITIES RESEARCH (FRI $1.30) Buy FINANCIAL STATEMENTS Analyst: Gavin Allen YEAR END 30 JUNE PERFORMANCE RATIOS 13A14A15F16F17F Income Statement 13A14A15F16F17F Sales 124.2261.9174.3207.8278.1 Other 16.011.210.6 7.0 7.0 Revenue 140.2273.1184.9214.8285.1 Operating costs -97.0-214.0-144.7-170.6-227.7 EBITDA 43.222.214.171.1247.4 Depreciation -0.2-0.1-0.1-0.1-0.1 Other non cash 0.00.00.00.00.0 EBIT 43.058.940.044.157.2 Net Interest income/(expense) 0.2-0.20.00.00.0 Associates 1.30.00.00.00.0 Other income/(expense) 0.00.00.00.00.0 Abnormal items (pretax) 0.00.00.00.00.0 EBT 44.558.7126.96.36.199 Tax expense -13.0-17.9-12.0-13.2-17.2 Discontinued operations 0.00.00.00.00.0 Minority interest -0.3-4.30.00.00.0 Reported Earnings 31.236.528.030.940.1 Dividends -13.1-13.2-13.7-13.7 0.0 Adjustments (one off ) 0.00.00.00.00.0 Retained earnings 18.123.314.317.240.1 Net Profit (ex valuation) 29.337.628.030.940.1 Growth & Margins Revenue Growth EBITDA Growth EBIT Growth Normalized Net Profit Growth EBITDA margin EBIT margin Normalized net profit margin Effective tax rate Cash flow (A$m) Returns Return on avg capital employed (%) 21% 25% 16% 16% 19% WACC (%) Return on assets (%) 12%16%16%15%14% Return on average equity (%) 16% 16% 11% 12% 14% 13A14A15F16F17F Pretax Profit 44.558.7188.8.131.52 + Depreciation 0.20.10.10.10.1 - Tax Paid -7.4-17.6-12.0-13.2-17.2 + inc (- dec) in provisions 0.0 0.5 -0.5 0.0 0.0 - Profit/+ loss on disposal 0.0 0.0 0.0 0.0 0.0 +/- Other 0.00.00.00.00.0 Gross Cashflow 37.341.727.731.040.2 - Capital expenditure 0.3 2.2-0.5-0.5-0.5 +/- Changes in working capital -32.9 55.7 -68.0 -29.3 27.4 Operating Free Cashflow 4.7 99.6 -40.8 1.3 67.1 +/- Investments 0.00.00.00.00.0 - Dividends -17.9-16.4-13.7-13.7 0.0 + Proceeds from equity raised 0.0 8.4 0.0 0.0 0.0 +/- (Acquisition) Disposals 0.00.0 50.00.00.0 +/- Minority interests 0.00.00.00.00.0 +/- Other -5.4-5.20.00.00.0 Net cashflow -18.686.4 -4.5-12.467.1 Cash at beginning of period -85.3 -103.9 -17.5 -22.0 -34.5 Net debt at end of period -103.9 -17.5 -22.0 -34.5 32.7 Balance Sheet ($m) 13A14A15F16F17F Cash 35.6 60.9 66.4 53.9 121.1 Receivables 24.3 184.108.40.206.1 Inventories 180.0 75.8114.4131.2116.8 Other 0.70.40.40.40.4 Current Assets 240.6148.2184.4189.4243.4 Receivables 12.046.113.315.921.3 Inventories 4.211.889.9 103.191.8 Property/Plant/Equipment 14.712.412.713.113.5 Equity Accounted Investments 1.10.00.00.00.0 Investment Property 122.1 135.085.085.085.0 Deferred tax assets 220.127.116.11.91.9 Other 0.00.00.00.00.0 Non Current Assets 156.5207.2202.9219.0213.4 Total Assets 397.1355.4387.3408.4456.8 Payables -33.4-12.0-20.1-24.0-32.4 Interest bearing liabilities -43.7 0.0-10.0-10.0-10.0 Current tax payable -9.0-13.5-13.5-13.5-13.5 Provisions 0.0-0.50.00.00.0 Current Liabilities -86.1-26.0-43.6-47.5-55.9 Payables 0.00.00.00.00.0 Interest bearing liabilities -95.8-78.4-78.4-78.4-78.4 Tax liabilties -9.2-11.8-11.8-11.8-11.8 Provisions -0.1-0.5-0.5-0.5-0.5 Non Current Liabilities -105.1-90.7-90.7-90.7-90.7 Total Liabilities -191.2-116.7-134.3-138.2-146.6 Net Assets 206.0238.7253.0270.2310.2 Contributed equity 137.8151.7151.7151.7151.7 Reserves 18.104.22.168.41.4 Retained profits 63.6 78.2 92.5109.7149.8 Minority Interests 22.214.171.124.47.4 Total equity 205.9238.7253.0270.2310.3 34% 111% -33% 19% 34% 13%37%-32%10%30% 13%37%-32%10%30% 45.3% 28.0% -25.4% 10.1% 29.7% 30.8%21.6%21.7%20.6%20.1% 30.7%21.6%21.6%20.5%20.1% 20.9%13.8%15.2%14.4%14.1% 29%30%30%30%30% Liquidity Capex/depreciation (x) Current ratio (x) Quick ratio (x) Receivable days Payable days 126.96.36.199.04.4 1.86.03.52.43.9 3139211219 613 61018 Risk Measures Dividend Cover (x) Payout ratio (%) Net interest cover (x) Net debt/equity (%) n/an/an/an/an/a 66%60%81%74% 0% na 294.6 na na na 50% 7% 9% 13% net cash SHARE DATA/VALUATION 13A14A15F16F17F Share Data Issued shares (m) Weighted ave shares (m) Fully diluted shares (m) Basic EPS (A$) YoY change (%) Fully diluted EPS (A$) YoY change (%) Fully diluted normalised EPS (A$) YoY change (%) Dividend/share (A$) Franking (%) Gross cashflow/share (A$) NBV/share (A$) NTA/Share (A$) 218.2220.8228.4228.4228.4 216.0220.8228.4228.4228.4 216.0220.8228.4228.4228.4 0.140.170.120.140.18 10%14%-26%10%30% 0.140.170.120.140.18 44%25%-28%10%30% 0.136 0.17 0.12 0.14 0.18 44%25%-28%10%30% 0.0950.1000.1000.1000.000 100%100%100%100%100% 0.170.190.120.140.18 0.941.081.111.181.36 0.941.081.111.181.36 Valuation PER (Basic) (x) 9.07.9 10.69.67.4 PER (Fully diluted) (x) 9.6 7.6 10.6 9.6 7.4 PER (Fully diluted, normalized) (x) 9.6 7.6 10.6 9.6 7.4 P/CFPS (x) 7.56.9 10.79.67.4 Price/NBV (x) 188.8.131.52.11.0 Price/NTA (x) 184.108.40.206.11.0 Dividend Yield (%) 7.3%7.7%7.7%7.7%0.0% Fully dil normalized 3 yr EPS Cagr (%) n/a n/a n/a n/a n/a PEG ratio (x) n/an/an/an/an/a EV 400.8 314.4 308.9 321.4 254.3 EV/EBITDA (x) 220.127.116.11.15.5 EV/EBIT (x) 18.104.22.168.15.5 EV/Revenue (x) 22.214.171.124.51.1 OTHER INFORMATION 12-mth High/Low (A$/sh) Average daily volume (A$m) ASX Code Next result $1.80/$1.28 0.2 FRI Aug 2015 COMPANY DESCRIPTION FRI is a WA based property developer WA Industrials Book - March 2015 All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of Euroz Securities Limited or any member or employee thereof. 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