With little good news in the SA property market over the past decade, it seems counterintuitive to be writing about mid-cap stock Balwin Properties.
The saying that real estate investing is as "safe as houses" hardly applies in this prolonged economic slump. Real house prices, factoring in inflation, have only seen a 5% return since 2008.
But there are glints of optimism that the real estate market may be bottoming out. Lending institutions seem to be more lenient with the repo rate at 6.5%. Still, there is no denying that the local economy remains on a knife-edge.
Balwin warrants market attention at this delicate juncture. The business has been in operation since 1996 and has an enviable track record as a developer with over 70 residential estates to its credit.
Listed on the JSE in 2015, its listing book build was heavily oversubscribed, with pricing at the upper end of the offer range. Some R1.76bn was subscribed for at a price of 988c a share, which reflected an earnings multiple of around 10.
After a brisk start, the gloomy economy started clouding Balwin’s prospects. From around February 2017, Balwin’s share price hit a slippery slope.
Financial 2018 and 2019 were not great years for the stock. Earnings in both years declined from a peak of 140c a share in 2017, with 104c a share (-26%) reported in 2018 and a further 8% decline in bottom line to 96c a share in 2019. The dividend was cut to conserve cash.
But the business remained solidly profitable. For financial 2019 Balwin managed an operating profit of R630m off revenues of R2.6bn. While this was hardly the performance of a struggling small cap, the market trashed the share price down to 180c (a price that reflected a dismissive earnings multiple of juts two).
What probably irked the market was Balwin’s sharp cut in dividends. On the 96c a share reported in 2019 a stingy dividend of 14.5c was paid.
What seemed to bolster sentiment was management’s decision to revise the business model and resume the core focus on affordable, quality one-and two-bedroom units.
Previously the market had seen Balwin move away from its core R600,000-R1.7m offering range by shifting into high-end elite developments (units priced from R2m-R2.5m) in Waterfall Estate in Johannesburg and Somerset West in the Western Cape.
Though the upmarket development sales were fair, the foray eroded the overall margin.
The new Balwin narrative emphasised margin protection, improved cash flows and a more generous dividend policy.
Interim results to August 2019 saw strong demand for properties and revenue rose 19% to R1.4bn with total like-for-like profit rising 6% to R185m. Headline earnings grew a modest 5% to 40c a share — but the interim dividend was 11.7c a share. Cash on hand rose sharply by over R200m to R273m and Balwin’s NAV increased to 593c a share.
The group also pointed to a strong development pipeline, with 28,000 units planned over eight years.
A key statistic showed that 70% of sales in the interim period were from one-and two-bedroom units.
The Balwin share price at the time of writing reflects a trailing earnings multiple of 3.7, which suggests that prospects for the full 2019 financial year and 2020 will be challenging. IM is not expecting much growth in headline earnings from the 96c a share reported in financial 2019 — but a more generous dividend policy will warm shareholders’ pockets.
While recognising the development risks facing the company in a prolonged economic downturn, IM recommends a BUY on the counter with a valuation target of 480c a share.
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