here comes the sunland

Hot Stock: Here comes the Sunland
Date May 16, 2013 - 2:06PM (0) Read later Greg Smith
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The recent 0.25 per cent cut in official interest rate by the Reserve Bank of Australia to its historic low of 2.75 per cent will prove a welcome shot in the arm for a number of industries. We see the domestic housing sector as being a key beneficiary, with all major banks passing on the full rate cut to borrowers, stimulating further demand (ANZ went even further by cutting its standard variable mortgage rate by 0.27 per cent). Weakness in the Australian dollar following the rate cut will also attract additional foreign flows, in our view. Regions specifically hampered by the high local currency in recent years will receive a further boost. And the tourism industry has of course been one of the hardest hit by the high Australian dollar. We expect regional property prices in tourist areas will receive a dual kick from the latest bout of easing by the RBA.

One area that we expect will benefit accordingly is Queensland, where property prices have underperformed compared to much of the nation. In this vein, we have identified Sunland Group as having significant leverage to the pickup in the Sunshine State's property market. Sunland is a Queensland-based property developer which was founded back in 1983. The company has a significant portfolio of properties across residential housing, urban development and residential multi-storey sites in Australia.

Outlook

Advertisement Operationally, the company has been performing admirably despite a challenging environment in recent years. Development revenue for the six months to 31 December 2012 came in at $77 million, with management expecting the second half to come in at $100 million. The group generated an after-tax profit of $8.4 million for the half year, albeit this was boosted by tax benefits from the sale of the Palazzo Versace Gold Coast. Meanwhile, the company's development portfolio has an end value of around $1.3 billion. More than half of the group's residential developments for this year will be centred in south-east Queensland, further bolstering the leverage to an expected recovery in the region's property prices. Marquee developments include the Parkway Collection at Sanctuary Cove, the Marina Residences and Concourse Villas at Royal Pines, and The Glades Peninsula at Robina, also on the Gold Coast.

Price

Sunland has been an exceptional performer on the ASX, rising 68 per cent and over 100 per cent over the past 6 and 12 months, respectively. This has been driven primarily by the still ongoing stock buyback program that has been in place since late 2011 and the consequent rise in net tangible asset backing, not to mention the company's substantial exit from Dubai.

Worth Buying?

We regard Sunland to be an excellent exposure to the expected recovery in the domestic property market, particularly in the Queensland region. This leverage is backed by a strong balance sheet (5 per cent gearing), solid cash flows and a net tangible asset backing of $1.86 per share as at 31 December 2012.

The stock is currently trading at 15.7 times fiscal 2014 earnings forecasts and an EV/ EBITDA multiple of 12 times. We do not see these multiples as demanding, particularly in light of the significant earnings leverage to the expected recovery in the Queensland property market.

Therefore, we believe Sunland is worth buying at current price levels.


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