Should Balwin be more ballin’ for investors? That’s not a typo. Ballin’ is a word, albeit one absent from the traditional dictionary. Among the younger crowd, it means you’re doing rather well financially. It’s appropriate in the context of Balwin, which targets younger buyers and first-time homeowners with primarily one-and two-bedroom apartments in attractive estates.
The brand is strong. People seek out a Balwin lifestyle, enjoying amenities such as an estate clubhouse and restaurant as well as fibre. It lets you feel like a millionaire, even if you only paid R1m for an apartment. Ballin’ indeed.
Balwin shareholders, on the other hand, have been bawling rather than ballin’ as the share dropped about 75% in the past five years. At first blush, with a revenue compound annual growth rate of 8.8% since 2016, the reasons for this aren’t as clear as the crystal lagoons in Balwin’s developments.
Respectable top-line growth has been ruined by gross margin deterioration and high operating cost growth. Sales growth of 11% in financial 2020 was entirely offset by gross margin deterioration from 30% to 27%. It will get worse in financial 2021, with a recent trading statement confirming that Balwin offered a 5% discount on new properties to help sales in the lockdown period.
With pressure on gross profit, it doesn’t help that operating expenses grew 36% in financial 2020. Management in this company certainly aren’t living in one-and two-bedroom homes, with R35m paid to directors and prescribed officers in financial 2020, representing nearly 15% of operating expenses. That feels excessive, especially as this remuneration grew 11% in a year when profit fell 9%.
At least management have suffered value destruction alongside shareholders, holding as they do more than 45% of the shares in Balwin — highly unusual in the property space.
Debt-to-equity has varied between 5% and 30% since 2016, a function of the business model and the stages of each underlying development. The base principle is that 50%-70% of each new development is financed by bank funding, with the rest funded by equity. With strong signs of recovery in the SA property market, IM is less concerned about the leverage than the margins.
Top-line prospects look fair, supported by an intelligent development pipeline and record low interest rates. The pipeline includes green apartments that tie in with a strategic alliance with Absa to provide "green bonds" to buyers. Green apartments represented 11% of total apartment sales in financial 2020 and that will increase in future.
This pipeline has been dwarfed by the Mooikloof mega development for the "gap" market with an initial 16,000 units and the ability to increase this to 50,000.
Another risk that niggles is that Balwin relies completely on municipal and provincial authorities in sourcing land for large projects. Somehow, Balwin has done this without concluding a broad-based BEE ownership deal. This is unlikely to be sustainable and the 2020 integrated report noted a need to identify an appropriate partner. These deals are usually costly and dilutive to existing shareholders.
Its cash balance is about one-third of the R1.3bn equity value. The 2020 dividend was deferred, which helped to preserve cash.
Pent-up demand is there, with 1,667 apartments forward-sold by end-August. The development pipeline is strong, but Balwin must concentrate on margins to give shareholders the same level of enjoyment that so many residents experience.
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