In the Covid-19 market of the past month to six weeks, many stocks have become even cheaper than they were in terms of valuations.
But what if a company was already at the bottom of the bargain basement before the slump? Balwin Properties could be classed as such a stock. The company tipped to a low of 180c (reflecting an earnings multiple of less than two) in the last quarter of 2019, then doubled as the market took cognisance of an updated corporate business strategy as well as a more generous dividend payout ratio.
In mid-March it released a trading update for its year ended February 2020. These results will not be affected by the lockdown’s disruptions.
Interim results to August 2019 reflected headline earnings ahead by 5%, to 40c a share. The interim dividend was 11.7c a share. For the previous full financial year Balwin paid a total yearly dividend of 14.51c a share, so the interim results reflected the new dividend policy. Cash on hand at the interim stage was R274m (a near R200m increase), which gave investors comfort about the operating position. For the full 2020 financial year, IM forecasts the cash position to rise to R475m, roughly a third of Balwin’s current market cap. That position of strength should reassure investors that the company can withstand the challenging conditions.
Balwin traditionally has a better second-half performance as new developments are marketed and sold. In the trading update Balwin said 2,700 apartments were sold in the period — a rise of 10.7%.
Revenue for the period should rise 10% as the mix of units sold trends back towards the more affordable properties.
In the past six months Balwin admits that increased costs, specifically in terms of senior staff and higher marketing and promotions costs, have tempered the profit margin. The gross margin in the interim period was 25%, against 30% achieved in the full 2019 financial year.
IM forecasts that the 2020 margin will show an improvement on the first half, but probably won’t match the levels of the 2019 financial year.
This margin forecast — coupled with the property mix changes in the revenue-generation model — leads IM to forecast that there will be a slight slippage from the 2019 headline earnings of 95.84c a share.
Balwin, in its own trading update, indicates a 6%-11% decline in headline earnings to 85.3c-90.5c a share. Taking a midpoint headline earnings estimate — the company trading at 250c at the time of writing — it would be trading on a prospective earnings multiple of 2.8. This is hardly a demanding market rating.
Since the beginning of March the share price has fallen 29%, placing the stock on a market capitalisation of R1.16bn. This is a market value that, readers should recall, is backed by about R475m in cash. From the stock’s low, the subsequent rally, and the Covid-19-induced dip, the company is off 32.6%.
IM understands that the Balwin development sales and pipeline remains solid. Overall, investment sentiment might remain brittle.
At 250c the challenges are probably priced in. What is not in the rating is the improved quality of the business and its preparedness. IM believes Balwin, at 250c, is a small to mid-cap worthy of consideration for any recovery portfolio.
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