research report · 2020. 9. 5. · report created on 2 may 2016 issuer name peet limited security...

Report Created on 2 May 2016

Issuer Name

Peet Limited

Security Name

Peet Bonds

Security Recommendation

Subscribe

Security Risk

High

Issuer Outlook

Improving Stable Deteriorating

Key Characteristics

Product Type Corporate Bonds

Issue Size* [$75,000,000.00]

Par Value $100.00

Fixed/Floating Fixed

PaymentFrequency

Semi Annual

CurrentDistribution**

7.50%

Issue Margin /Coupon**

7.50%

Franking CreditsIncl.

No

ASX ListedYes (Prospective

ASX Code: PPCHA)

Convertible No

GICS Sector Real Estate

Last Price $100.00

Accrued -

Capital Price $100.00

Running Yield** 7.50%

Yield toMaturity***

7.50%

Trading Margin 5.14%

Optional Call Date -

Legal FinalMaturity

7 June 2021 (5Year)

Next Ex-Date -

Next PaymentDate

16 December 2016

Next CashDistribution****

$3.75

* Size is subject to change. The issuer has guided to a size of $75 million. ** Based on a prospective issue margin of 5.14%. Actual margin to be set atbookbuild. *** Based on a prospective issue margin of 5.14% and interpolated swap rate to maturity of 2.36%. Actual margin to be set at bookbuild. ****Actual cash amount based on $100 face value.

Summary

On the 2nd of May 2016 Peet Limited (ASX Code: PPC) announced a new issue, Peet Bonds (Prospective ASX Code: PPCHA). Thesize of the offer is indicated at $75 million but will change based on demand. The purpose of this transaction is to helprefinance the existing Peet 9.5% Convertible Notes (ASX Code: PPCG) while further diversifying and increasing the averagematurity of Peet’s debt profile. The notes will also be used for general corporate purposes.

The bonds are structured as simple corporate bonds meaning they have no optionality and interest payments are mandatory.To qualify as a simple corporate bond this security has met specific legal eligibility requirements on the issuer and thesecurity. The bonds are protected by event of default conditions which give the holder the right to recover any unpaidprincipal or interest subject to issuer solvency. The simple corporate bond regime does not allow noteholders to besubordinated to unsecured creditors. The notes are guaranteed by the issuer and all wholly-owned subsidiaries of the issuer.

The bonds pay a fixed rate coupon (to be set at bookbuild but guided at 7.50%) payable on a semi-annual basis in arrears onthe 16th of June and December each year. The bond may only be redeemed on its legal final maturity date (7 June 2021) orwhen a Tax Event, Change of Control Event or a Clean Up Condition exists.

Bond holders are protected by a series of covenants such as a negative pledge (net secured debt cannot be more of 40% oftotal adjusted assets) and restrictions on indebtedness (net total debt cannot be more than 50% of total adjusted assets). Moreinformation can be found in section 2.1 of the Base Prospectus.

Figure 1: Capital Structure1

17.0%

16.0%

16.0%

51.0%

Senior Secured

Senior Unsecured

Other liabilities

Common Equity

Figure 2: Relative Value2

Research Report

www.bondadviser.com.au© 2016 BondAdviser. All Rights Reserved.

2 May 2016 |

Security Recommendation - Subscribe as at 28 April 2016

We initiate coverage on the proposed Peet Bonds (ASX: PPCHA) with a Subscribe recommendation. Our valuationassumptions are based on the security being redeemed (in full) on the legal final maturity date (7 June 2021) and all interestpayments being made in a timely manner. There are a number of comparable issues within the Real Estate Sector includingMirvac, Stockland and Lendlease. There is a difference in credit risk between these issuers. From an operational perspective,Peet is focussed on land banking and arguably has greater project risk than its competitors. Our relative value analysissuggests the notes are offered to investors at a margin that is considered fair and commensurate with risk of the security. Thesensitivity to our valuation assumptions can be found in the relative value section.

In our opinion the overall credit risk of the issuer has improved significantly since the last issue (2011). In comparison, netdebt has been reduced by almost a third, revenue streams have evolved and a lower cost base has been achieved. Weacknowledge that the gearing covenant has been maintained but we expect the company will prudently manage the group’sbalance sheet within these covenants.

At the current stage of the property cycle we believe Peet is positioned well. The group took the opportunity to strengthen itsbalance sheet during the recent growth phase of the residential market while investing in and managing projects with lowcapital intensity. This strategy has paid off and with a sales pipeline valued at $12 billion targeted at low to middle incomeowner occupiers we expect the group’s strategy will be able to sustain margins while limiting the negative impact of earningscyclicality.

Peet has a strong history of successful land development while maintaining strict controls on its balance sheet. Theperformance of the PPCG notes during a period of uncertainty is a testament to the group’s performance and strategy. Forthis reason, we expect the notes to perform well through the property cycle.

Positive / Negative Risk Factors

What factors would change the Recommendation UP

• Recently, Peet Limited began development on the University of Canberra's Belconnen campus into an academic andsocial hub, including a residential community. Student housing continues to be a strong growth driver in Australianproperty and may present new opportunities for the group;

• A history of prudent capital management and stable polices is a credit positive. Further reduction of net debt (totarget less than 25% gearing) through organic sales growth and strategic land acquisitions;

• Funds Management business continues to grow resulting to higher margins for the group as a whole through projectswith low capital intensity;

• Development spend is expected to be self-funded through operating cashflows, reducing the possibility of furtherindebtedness.

• Peet has minimal exposure to medium density residential property (apartments and units) and investor drivendemand. This allows the group to avoid leglisation regarding restrictions on investor demand and the potential over-supply in Sydney and Melbourne apartment markets;

• Strong track record, management expertise and strategy continue to prevail in future turns in the property cycle;

• Ability to scale back development in unfavourable market conditions. Peet derive most of their value through landrather than housing enabling the group to retain in more stable land assets;

• Well positioned for coming years with pipeline valued at $12 billion. This will generate sufficient cashflow in thefuture, decreasing the possibility of liquidity pressure.

What factors would change the Recommendation DOWN

• Potential for prolonged sales risk associated with the group’s Flagstone project which is expected to continue forexcess of 30 years. This project (valued at $3 billion) makes up 25% of the group's pipeline and any threat to its valuewill significantly impact earnings growth;

• Further increases in residential mortgage interest rates as a result of tighter bank regulation. This will have adverseimpact on owner-occupier demand, especially in Peet’s target customer bracket on low to middle income earners;

• Negative economic impact and sentiment. This includes reduced consumer confidence, increases in theunemployment rate, declining wage growth and low levels of migration (both inter-state and internationally);

• Changes to government legislation that reduce the affordability of house and land packages including taxation (landtax, stamp duty) or incentives (first home owner grant);

• Peet is subject to settlement risk. This is often higher with lower income earners and can result in cashflow volatilityand subsequent liquidity pressure;

• Project forecasts miss targets in Western Australia and the Northern Territory could be a drag on earnings. Thesestates have performed poorly post the mining boom and this is expected to persist for some time;

• Deterioration in investor demand for syndicates in the Funds Management business. Given the increased weightingof total projects to this segment, a slowdown in demand would cause a sharp reduction in revenue.

Research Report


2 May 2016 |

Issuer Outlook - Stable as at 28 April 2016

Earnings

The Australian residential property market has performed strongly over the past 5 years and this is reflective in the earningsof land developers. As a result, Peet has provided average Revenue and EBITDA growth of 36% and 26% respectively over thepast 3 years. This has been fuelled by demand from both owner-occupiers and investors forcing an upward trend in propertyprices which in turn created material earnings growth for the group. The underlying driver of this success has been Peet’sability to correctly time projects enabling the group to ride the property cycle accordingly (i.e. selling land lots when thedemand is strong and holding off when demand is subdued) while always maintaining a low cost base.

The group’s most recent results (first half 2016), shows a slight reduction in demand in the weaker states (namely WesternAustralia and the Northern Territory) resulting in a 12% decrease in lot settlements. This was partially offset by strongerconditions in Victoria demonstrating the strong diversification of the group’s portfolio. This resulted in a 26% decrease inrevenue to $135 million and 12% decrease in EBITDA to $40 million over the 6-month period. Operating profit increased by8% to $19 million due to a reduction of the group’s finance costs (lower debt levels). Consensus estimates for the 2016 fullyear are slightly down on 2015 with revenue of $330-340 million and EBITDA of $80-90 million reflecting expectations ofdemand moderation.

Due to the nature of the group’s operations, earnings mirror the state of the residential property market and wider economiclandscape. However, this is a known fact to Peet and the group continually improves the efficiency of their operations toreduce the cyclical impact on earnings. The group’s EBITDA margin has increased by 7% since 2013 and now sits at 29%. Thishas been a strategic move by management as Peet’s once traditional business model focusing on company-owned projects hasevolved to incorporate funds management related activities. This relatively newer segment now generates excess of 60%EBITDA margin (40% higher than company owned projects) and it is no surprise that the group has strategically weighted its$12 billion pipeline towards this type of business (60% pipeline weighting). As a result, Peet has been able to substantiallylower its cost base while reducing the capital intensity of its operations. At the end of 2011, each dollar of net debt yielded 20cents of EBITDA while at the end of 2015, for each dollar of net debt Peet was able to produce 47 cents of EBITDA. This reflectsstrong balance sheet management and clear execution of strategy.

From an economic point of view, key indicators are displaying mixed results. Population growth appears to be sustainableand labour markets continue to improve but political uncertainty and further credit tightening by banks should have adverseimplications for property markets in the medium term. However, we take comfort in Peet’s pro-active management approachto identifying and extracting value from land (which is much more stable) rather than construction and housing as well asthe group's minimal exposure to the potentially over-supplied apartment market in Melbourne and Sydney. Given the strongposition of Peet’s balance sheet, a decline in land prices may even lead to fresh acquisitions at discounted prices. With 48,000lots in the pipeline, strategically weighted to the east coast states (reducing exposure to a struggling Western Australia) wetake comfort Peet’s track record of successfully syncing projects with economic trends and expect this to reoccur at theproperty cycle progresses.

Cashflow

Due to timing differentials between land acquisition, development and sales there can be pressure on cashflow at certainperiods of the property cycle. However, Peet has been able to successfully manage this cyclical influence with operating cashflow turning negative only once in the last 3 years (half year results 2014). Operating cashflow for the half year 2016remained positive at $14 million but declined by $51 million in the prior corresponding period due to reduced lot settlements.This is expected to improve in the second half of 2016 as more settlements are scheduled.

Although free cash flow was partially impacted by this result, a 34% increase in dividends paid was the major contributor tonegative free cash flow (-$1.6 million) for the half year ended. However, management have indicated that without any furtheractions/decisions, Peet would still remain cash positive until the end of 2017.

Capital Management

Due to unexpected turns in the property cycle, strict capital management is imperative to success in land banking. When themarket is trending upwards, developers tend to strengthen their balance sheets in expectation that excess capital will providea safety net when demand softens. This includes investing in riskier areas when the residential property market is growing insync with the economy and becoming more risk averse when things start to cool off and adjusting the capital mixaccordingly.

Peet have followed this strategy over the last few years. The mining boom and subsequent surge in the residential propertymarket allowed the group to increase in exposure to Western Australia (54% of pipeline in 2011) resulting in large revenuegrowth. However, given the current economic landscape the group have adjusted their strategy and allocated capital to morelow-risk areas along the east coast of Australia (60% of pipeline in 2016). Instead of continuing to chase growth at the expenseof the balance sheet, the group used its strong financial position to considerably reduce its net debt from $291 million in 2011to $177 million in 2015. This has increased slightly to $186 million following the acquisition of Tarneit residential estate inVictoria. As a result, Peet’s debt-to-capital ratio has improved significantly declining from 52% in 2011 to 27%. We also takecomfort in management actively raising new equity ($51 million equity capital raising in 2015) to manage capital. In turn thishas reduced the group’s finance costs and interest cover remains strong at 4.0x.

To further reiterate Peet’s disciplined capital management, the group targets a gearing range of 20-30%. Although gearing hasincreased from 23% to 31% in the last 12 months, management have indicated that this will decline within the target range bythe end of the 2016 financial year. For the purposes of this calculation we include land vendor liabilities as debt and a sharpincrease in these obligations is the primary reason for the higher gearing ratio. Land vendor liabilities refer to obligatedfuture payments to land vendors for the purchase of properties with deferred payment terms and are unsecured. Followingthe refinancing of the existing convertible notes, the remaining funds will be used to pay down secured debt. Our calculationssuggest that this will leave Peet credit neutral and we expect additional cash will be utilised to reach the group’s gearingtarget range. This will leave sufficient headroom on the covenant level of 50%.

Peet’s secured debt comprises a $250 million 3-year secured facility with NAB and ANZ which has been drawn down to $186million at the end of 2015 resulting in secured debt ratio of 13.5% (note land vendor liabilities are excluded as they asunsecured obligations). We expect this to reduce slightly to 11.5% (subject to the market value of inventory adjustments) atfinancial year end as the excess proceeds of the new note issue will be used to pay down drawn funds. Given the covenantlevel of 40%, this gives Peet sufficient headroom to explore growth opportunities as they appear.

Research Report


2 May 2016 |

Although dividends increased slightly over the 2015 the group’s payout ratio of 50% was maintained. This increase ismitigated by the group’s dividend reinvestment plan. This remains deactivated which is a credit negative but can be utilisedin the future to further enhance Peet’s balance sheet.

Outlook

Peet’s success is attributable to its ability to adapt. Historically a direct land bank investor primarily utilising its own capital,Peet has expanded its revenue base (while lowering its cost base) enabling the group to diversify project risk throughdiffering ownership structures in its funds management and joint venture businesses. This is evident in management’scurrent strategy as these segments are weighted towards Western Australia, reducing the group’s overall development riskinherent in its pipeline. Therefore, it is no surprise that Peet will continue to grow its Fund Management business to takeadvantage of its capital efficient nature. Management have forecasted Fund Management EBITDA to be $55 million for the2016 financial year (up 94% on 2015) with a 65-70% EBITDA margin maintained.

12 projects are expected to commence in 2016 (including the group’s 12,000 lot Flagstone project in Queensland) and 80% ofthe Peet’s land bank is expected to be in development by the end of 2017 driving sales momentum in coming years.

Although we have some concerns regarding the Australian residential property market, Peet have clearly demonstrated theirability to efficiently manage their balance sheet at all stages of the property cycle reflecting the seasoned expertise ofmanagement. Given the strength of the group’s current balance sheet and pro-active management of its pipeline, we expectPeet to continue this strategy and capitalise on the next residential property market upswing.

Next Event: Peet Limited Full Year Results to be published in August 2016.

Research Report


2 May 2016 |

Figure 3: Credit Curve (Comparable Securities)2

Figure 4: Historical Trading Margins of Comparable Securities

1 The balance sheet structure diagram represents a measure of liabilities and captial in order of seniority of the overall cash balance sheet.2 Pricing as at close of business 28 April 2016

Source: BondAdviser

Research Report


2 May 2016 |

Relative Value

Peet Limited is Australia’s largest pure-play residential land developer. In terms of size smaller groups

include AVJennings (ASX Code: AVJ), Sunland (ASX: SDP) and Villa World (ASX Code: VLW) while the

larger participants are Lendlease (ASX: LLC), Stockland (ASX: SGP) and Mirvac (ASX: MGR).

Lendlease Corporation is a multinational property and infrastructure group. The group focuses on

commercial, residential, retail, retirement and industrial property and has an integrated business

model consisting of development, construction and investment management. This includes residential

land banking.

Stockland is a diversified property group that manages, owns and develops shopping centres,

industrial property, residential communities and retirement villages. The majority of the group’s

earnings is derived from retail and residential real estate assets. In 2015, the group owned 64

residential communities.

Mirvac Group creates, owns and manages real estate assets in Australia across office, retail, industrial

and residential sectors. The group’s development business has exposure to residential projects.

AVJennings Limited is a residential property developer that is listed on the Australian Securities

Exchange (ASX) and Singapore Exchange (SGX). The group operates in Australia and New Zealand and

purely operates in the residential sub-sector of the property market.

Sunland Group is primarily involved in the development and sale of land and medium-density

residential housing projects but has some interests in high rise apartment projects. The group operates

on the east coast of Australia.

Villa World Limited is residential property development and construction group that operates on the

eastern coast of Australia. The company comprises two business segments, Queensland/NSW and

Victoria and offers ready-to-live house packages, townhouses and land.

Figure 1: Relative Value Credit Curve as at 22nd of April 2016

Source: BondAdviser

Stockland 7.50% 2016

Mirvac 8.00% 2016Mirvac 5.50% 2017

Lendlease 5.50% 2018


Lendlease 6.00% 2020

Mirvac 5.75%


Peet 7.50% 2021


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0 1 2 3 4 5 6 7

Term (Years)

Research Report


2 May 2016 |

While Peet’s smaller competitors offer no debt securities for relative value analysis, we utilise the credit

profiles of Mirvac, Stockland and Lendlease to support our thesis. The diverse operations of these larger

industry participants are not directly comparable to the pure-play strategy of Peet and the risk

premium illustrated on the credit curve reflects this difference. In terms of similar maturities,

Lendlease 6.00% 2020 offers the smallest risk premium of 2.70% while Stockland 8.25% 2020 offers the

largest risk premium at 3.71%.

This risk premium is primarily a function of diversification. Although these companies have interests in

land banking, their operations span over many other activities and sub-sectors:

Lendlease is a multinational corporation that develops, constructs and manages industrial,

residential, residential and retail real estate assets.

Mirvac comprises an investment portfolio and development business across office, retail,

industrial and residential property.

Stockland is Australia’s largest diversified property group and is involved in retail centres,

business parks, office buildings, residential communities and retirement villages.

In comparison, the risk inherent in Peet is more concentrated due to the nature of their projects.

However, due to the group’s long history of managing projects over many cycles we believe the

premium offered compared to its peers is justified per unit of risk.

Peet's current ASX-listed senior unsecured convertible bond ($50 million issue) has performed well over

its life (with the exception of margin volatility leading up to redemption) providing buy and hold

investors a ~65% return over life of the security.

Figure 2: Historical Trading Margin for Peet 9.50% Convertible Notes (ASX Code: PPCG)

Source: BondAdviser

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

Research Report


2 May 2016 |

Who are the Key Competitors?

Table 1: Residential Land Development Industry Market Share

Lendlease

(ASX

Code:

LLC)

Stockland

(ASX

Code:

SGP)

Mirvac

(ASX

Code:

MGR)

Peet

(ASX:

Code

PPC)

AVJennings

(ASX Code:

AVJ)

Sunland

(ASX

Code:

SDG)

Villa

World

(ASX

Code:

VLW)

Sales

($million)

FY15

1560.2 1245 1132.9 354.4 317.9 289 324.3

Market

Share 17.7% 14.1% 12.9% 4.0% 3.6% 3.3% 3.7%

Source: Company Reports, BondAdviser Estimates

Figure 3: Residential Land Bank Pipeline of Key ASX-listed Competitors

Source: Company Reports

Banks are the primary provider of funding to land bankers and generally enforce gearing limits in the

range of 45% – 50%. Peet expect gearing to drop back into its 20% - 30% target range and towards the

industry average of 23%. (Note: Peet Limited gearing for the 2015 Financial Year was 23.8% showing

that this reduction is achievable).

Table 2: Key Credit Metrics of Competitors (as at December 2015)

Interest Coverage

(LTM) Gearing (1H16)

Peet Limited (PPC) 4.0x 30.6%

Lendlease (LLC) 7.7x 12.10%

Stockland (SGP) 4.2x 23.1%

Mirvac (MGR) 4.5x 28.3%

AVJennings (AVJ) 4.9x 24.1%

Sunland (SDG) 3.4x 33.6%

Villa World (VLW) 5.8x 9.9%

Source: BondAdviser, Bloomberg

77050

62780

47940

15742

104195999 5869

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Stockland Lend Lease Peet Mirvac AVJennings Sunland Villa World

Lo

ts

Research Report


2 May 2016 |

Market Size

The residential land development and subdivision industry generated approximately $8.8 billion in

revenue for the 2014/15 financial year and is expected to grow by 5.4% p.a. in the 2015/16 financial year

(this is expected to moderate to 1.5% p.a. in coming years). Low density residential owner occupiers

(Peets target customer) account for 60% of industry revenue.

In 2010-2011 the market experienced a slowdown caused by a number of factors including restrictions

on first home buyer subsidies. Following this the market experienced significant growth with excess

demand driving house prices upwards. As a result construction activity has increased and we are now

in a position where supply is beginning to catch up with demand and hence we growth to moderate in

coming years. There has been some speculation of oversupply in apartment and unit markets but this is

not the focus of our analysis. The primary drivers supporting Land development and subdivision

corresponding to housing starts will inevitably experience a short-term slow down but the long term

drivers (i.e migration) will support it over the medium term.

Figure 4: Value of Residential Building Work Done and Commenced ($millions)

Source: Australian Bureau of Statistics

Figure 5. Value of Residential Dwelling Stock as multiple of Rolling 12 month GDP

Source: Australian Bureau of Statistics

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

Ma

r-2

00

0

Se

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00

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01

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01

5

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01

5

Value of Residential Building WorkCommencedValue of Residential Building WorkDone

4000

4200

4400

4600

4800

5000

5200

5400

5600

5800

6000

2.9

3

3.1

3.2

3.3

3.4

3.5

3.6

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p-2

01

1

No

v-2

01

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Jan

-20

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01

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01

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Jul-

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15

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p-2

01

5

No

v-2

01

5

Value of Dwelling Stock($billions) (RHS)

Value of Dwelling Stock/Rolling12 month Real GDP (LHS)

Research Report


2 May 2016 |

Industry Drivers

The revenue and profitability of residential developers and land bankers are generally highly

correlated to the state of the overall economy. Therefore, the industry is predominantly driven by

macroeconomic themes, consumer expectations and government policy/incentives. Understanding how

these key drivers influence demand is key to understanding the sector.

Figure 6: Peet Limited Total Revenue Vs Total Dwelling Units Approved

Source: Australian Bureau of Statistics, Bloomberg

Macroeconomic Themes

Peet is ultimately a beneficiary of the Australian residential property market and is impacted by

macroeconomic trends that are linked to this sector.

Population Growth continues to be a historically high levels driven by increased overseas

migration. This now accounts for 60% of Australian population growth. On a state level,

Western Australia and Queensland are still experiencing a cool off period post the mining

boom and is set to continue given subdued global commodities markets. This has improved

housing affordability. On the other hand, New South Wales and Victoria are growing at a

constant pace and affordability levels continue to deteriorate. The Australian Bureau of

Statistics (ABS) forecasts annual population growth of 1.5%.

Economic Growth has moderated from its last peak in 2012 and has remained in the 2-3%

range over the last 2 years. However, this is expected to increase as Australia’s services sector

continues to strengthen (currently 65% of GDP). This growth rate is relatively strong in

comparison to other OECD countries.

Labour markets continues to improve. The unemployment rate has gradually declined from its

high in 2015 at 6.3% to 5.7% in March 2016. This follows the downward trend in

unemployment since mid-2014.

RBA, Government Policy and Regulation

Peet is subject to changes to legalisation (potential tax reform), monetary policy and bank regulation.

There is uncertainty regarding this year’s budget in May and this will be a major contributor to the

direction of the residential property market. This is reflective in current consumer sentiment as many

potential buyers and existing residents are taking a more cautious approach.

7

9

11

13

15

17

19

21

23

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Peet Limited Revenue ($millions) (LHS)New House Dwellings (millions) (RHS)

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2 May 2016 |

In historical terms, interest rates remain low. However, recent regulatory changes (made by APRA)

have forced the banks to increase their capital levels which has in turn meant they have passed on to

cost to consumers through higher mortgages rates. Further credit tightening may result in a softer

residential property market in the medium term.

Figure 7: Variable Lending Rate for Housing Loans Vs Cash Rate

Source: Australian Bureau of Statistics, Reserve Bank of Australia

Figure 8: Consumer Sentiment Index

Source: Westpac, Melbourne Institute

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

Jan

-20

10

Ap

r-2

01

0

Jul-

20

10

Oct

-20

10

Jan

-20

11

Ap

r-2

01

1

Jul-

20

11

Oct

-20

11

Jan

-20

12

Ap

r-2

01

2

Jul-

20

12

Oct

-20

12

Jan

-20

13

Ap

r-2

01

3

Jul-

20

13

Oct

-20

13

Jan

-20

14

Ap

r-2

01

4

Jul-

20

14

Oct

-20

14

Jan

-20

15

Ap

r-2

01

5

Jul-

20

15

Oct

-20

15

Jan

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RB

A C

ash

Ra

te

Va

ria

ble

Le

nd

ing

Ra

te f

or

Ho

usi

ng

Lo

an

s

Variable Mortgage Lending Rate

Cash Rate

80

85

90

95

100

105

110

115

120

125

Ind

ex

Le

ve

l

Research Report


2 May 2016 |

Land Banking

Land banking is a relatively simple process. Companies acquire and develop land to subsequently build

into communities to sell in the future. Peet predominantly develops land to be built into housing but

these projects can also lead to retirement villages or medium density residential buildings such as units

or apartments. Land developers generally either sell land directly to owner-occupiers or partner with

third party builders (i.e. Metricon, Simonds Homes) to arrange house and land packages.

What makes operating in this sector difficult is timing. Land banking is subject to the sales cycle

whereby timing differences between the purchase of land and cash flow generation will test the

balance sheet during periods of unfavourable market conditions. As a result, industry success is highly

correlated to the health of the overall economy. Therefore, the key land development is being able to

sync the stages of planning, development, marketing and selling to the correct periods of the economic

cycle while ensuring the strength of the underlying balance sheet is maintained. In other words, land

developers ride the property cycle. Although this will result in some earnings volatility, this will allow

the developer will be able to prosper in strong markets while surviving in weaker markets.

Projects

Peet currently owns and manages a diversified pipeline of approximately 48,000 lots valued at around

$12 billion. This has been strategically positioned away from struggling states, namely Western

Australia and new projects being considered are primarily on the east coast. The group has 2,318

contracts on hand.

The group plans its developments based on market conditions and currently expects to have 80% of its

land bank in development by the end of 2017. The ability to quickly adjust development plans to market

conditions is a key feature of the group. The group will able to start pre-selling their projects when the

property market enters a phase of growth to capitalise on its strategy. This ensure sustained EBITDA

over the medium term.

In 2015, Peet embarked on one of their largest projects to date (Flagstone City in Queensland). The

project value is estimated at $3.2 billion (25% of the group’s current pipeline) and consists of 11,749 lots.

First sales for Flagstone are expected to be taken in the current period and the project is expected to

run for 25+ years. This project is a joint venture owned equally with MTAA Super.

Land lots are expected to sell for between $125,000 and $160,000 which reiterates the group’s target low

to middle income earning customer base. This price point allows affordability and enables Peet to sell

the project primarily to the owner occupiers market. On average, Peet bought Flagstone for $7,000 a lot

and expect to generate strong margins on the project.

Table 3: Flagstone Project Sales Forecast FY16-FY19

Financial Year Lots

Revenue: Worst

Case

Revenue: Best Case

2016 80-100 $10m $16m

2017 ~180 $22.5m $28.8m

2018 220-240 $27.5m $38.4m

2019 300+ $37.5m $48m+

Source: Company & BondAdviser Estimates

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2 May 2016 |

Other prominent projects include Aston / Craigieburn in Victoria (1729 of 2479 lots remain available) set

for completion in 2024 and Googoing in the ACT (4904 of 6000 lots remain available) set for completion

in 2033. The latter is a joint venture with Mirvac Group.

Business Model

Peet Limited follows a staged business model whereby it acquires, manages, develops, markets and

finally, sells land estates. The group is involved in the residential sub-sector and has very limited

exposure to the medium density apartment market (less than 3.5%). This includes no exposure to the

Sydney and Melbourne unit/apartment market. The key to the group’s success is acting on growth

opportunities subject to timing of favourable market conditions. This has developed into a strong track

record.

Projects are targeted at low and middle market segments and funded by either external investors’

equity (syndicated or joint venture projects) or by the group’s own capital and credit lines. Peet

currently manages 70 projects across three succinct business segments: Funds Management: Primarily involves syndication whereby projects are offered to retail

(generally $20-30 million) and/or institutional investors (generally $50 million or more). The

project is then managed by Peet who earns underwriting fees, ongoing fees and performance

fees. This business segment enables Peet to utilise various land ownership structures.

Company-Owned Projects: Direct acquiring of land for residential development purposes. Peet

generates profit through the sale of lots.

Joint Arrangements: Relates to the development of land on behalf of or co-owned with

government, statutory authorities and private landowners. Peet earns predominantly

management fees from these arrangements.

The growth engine of Peet is its highly capital efficient funds management business. All debt funding is

project specific and not guaranteed by Peet Limited or any of its subsidiaries. The group rarely deploys

company capital to this types of projects and as a result, the low-cost base of these projects allows Peet

to realise a 60% EBITDA margin.

Peet’s customer base primarily consists of owner-occupiers to ensure its projects do not become vacant

lots owned by property investors. Generally, the group’s customer base consists of 80% owner-

occupiers, 15-20% investors and less than 5% foreign buyers. This ensures that the group limits the

impact of any changes to legalisation that restricts investor-driven demand in the residential property

market while also achieving the goal of building sustainable communities.

Following the recent decision of Peet to acquire the remaining shares of CIC Australia Limited in 2015

(now a subsidiary of Peet Limited), the group now has a project in every mainland state. This has

allowed the group to diversify its portfolio, reducing its vulnerability to state-specific risks while also

capitalising on regional growth opportunities as they appear. As a result, the group has been able to

somewhat combat the full impact of the sluggish WA market.

Additionally, the group’s land bank is spread across its three business segments and reduces the overall

inherent risk to Peet through various ownership structures. Traditionally Peet primarily focused on

company-owned projects but its evolving business model now allows less capital intensive ownership

structures through its Funds Management and Joint Venture divisions.

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2 May 2016 |

Figure 8: Divisional and Geographical EBITDA Contribution for the Half Year 2016

Source: Company Reports

Stress Testing

The obvious risk to any Real Estate business is a sharp and protracted period of negative house price

growth. Although we do not expect this type of event for the sake of our analysis we assume a scenario

whereby house prices drop 15-20% over a 24 month period.

The obvious result of this is that land value will decrease. However, it will not decrease at the same rate

as the house (i.e. we assume ~12-16% for land values). This is a key consideration for Peet relative to

construction companies.

This assumption will affect all residential land developers but as one of the lowest cost producers in

Australia Peet is well positioned to handle a correction such as the above. For example the average cost

base per lot at Flagstaff is ~$9k compared with a sales value of ~$120k. This provides Peet with the

ability to discount sales values to maintain volumes (a key risk mitigants of this type of event).

Ultimately this will have a negative effect on the tangible asset base but operating cash flow should be

sustained.

In this scenario operating cash flow should remain relatively stable as large proportion of cash outflow

is discretionary whereas cash inflow is contracted in pre-sales. There is no doubt that this scenario

would cause short term stress on the balance sheet (including banking covenants) but we remain

confident that management has in place sufficient levers to offset this type of risk.

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2 May 2016 |

Peet Limited: Financial Summary

Peet Limited: Financial Summary Recommendation Summary Subscribe

2 May 2016

Profit or Loss 2015 2014 2013

Revenue from Land Sales ($m) 300.0 223.8 208.6

Management/Performance Fees ($m) 47.3 44.4 21.4

Other Revenue ($m) 7.1 7.9 2.7

Total Revenue ($m) 354.4 276.1 232.7

Land & Development Cost ($m) -217.8 -167.9 -157.3

Depreciation & Amortisation ($m) -2.9 -2.8 -2.8

Other Expenses ($m) -74.5 -73.9 -48.7

Total Expenses ($m) -295.3 -244.6 208.8

Finance Costs ($m) -5.8 -8.8 -8.1

Share of JV Profit ($m) 6.4 20.6 1.8

Other ($m) -1.8 -24.9

Pre-Tax Profit ($m) 59.7 41.5 -1.0

Taxation ($m) -17.8 -9.9 0.2

Non-Controlling Interest ($m) -3.5 -1.3 1.6

Net Profit ($m) 38.5 30.3 0.9

Credit Metrics 2015 2014 2013Credit Metrics

Net Leverage (x) 1.90 3.50 5.30

Interest Cover (x) 4.00 2.80 1.70

Revenue Growth (%) 22.00 23.00 66.00

EBITDA Growth (%) 25.00 39.00 14.00

EBITDA Margin (%) 26.00 25.00 22.00

Covenant Gearing (%) 24.0 30.0 34.0

EBITDA Composition 2015 2014 2013

Development (%) 48.0 31.0 50.0

Funds Management (%) 30.0 36.0 33.0

Joint Ventures (%) 22.0 33.0 17.0

EBITDA Geography 2015 2014 2013

SA (%) 6.0 7.0 2.0

NT (%) 5.0 6.0

WA (%) 32.0 39.0 20.0

VIC (%) 34.0 26.0 59.0

NSW/ACT (%) 16.0 12.0 8.0

QLD (%) 7.0 10.0 11.0

Balance Sheet 2015 2014 2013

Cash & Liquids ($m) 57.7 38.8 36.4

Receivables ($m) 105.7 81.2 68.5

Inventories ($m) 520.5 540.6 542.1

Equity Acc. Inv ($m) 181.8 152.6 147.1

Intangibles ($m) 2.6 2.9 2.8

Other ($m) 6.8 31.0 33.4

Total Assets ($m) 875.1 847.1 830.3

Payables ($m) 63.3 55.5 49.4

Current Borrowings ($m) 65.8 50.6 85.9

Non-Current Borrowings ($m) 169.1 244.9 235.1

Provisions ($m) 11.6 11.8 10.5

Other ($m) 81.4 64.3 69.1

Total Liabilities ($m) 391.2 427.1 450.0

Net Assets ($m) 483.9 420.0 380.3

Net Debt ($m) 177.0 257.0 285.0

Cashflow 2015 2014 2013

Cash from Operations ($m) 148.8 63.3 96.1

Purchase of Land ($m) -19.9 -12.8 -3.5

Finance Costs ($m) -20.4 -27.0 -31.0

Dividends Received ($m) 9.1 18.1 2.6

Taxation ($m) -4.3 -4.5 5.5

Net Operating Cashflow ($m) 113.3 37.2 69.7

Payments for PPE ($m) -2.5 -1.4 -1.4

Payments for Intangibles ($m) -0.5 -0.5

Payments for Invesments ($m) -33.0 -19.8 -2.4

Other ($m) -16.2 13.1 -52.9

Net Investing Cashflow ($m) -51.7 -8.6 -57.2

Change in Borrowings ($m) -61.9 -29.6 -117.3

Equity Issuance ($m) 49.8 3.4 120.3

Dividends Paid ($m) -21.4 -3.8

Other ($m) -9.2 0.5

Net Financing Cashflow ($m) -42.7 -26.2 -0.2

Change in Cash ($m) 18.9 2.4 12.3

Free Cashflow ($m) 89.2 35.3 64.0

Operational Performance 2015 2014 2013

Lot Sales (#) 3,229.0 3,525.0 2,308.0

Lot Settlements (#) 3,266.0 3,491.0 2,091.0

Contracts on Hand by Lots (#) 2,096.0 2,061.0 1,990.0

Contracts on Hand by Value ($m) 451.0 441.0 468.0

Total Pipeline ($m) 11,315.0 11,384.0 10,523.0

Source: Company data, BondAdviser estimates.

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2 May 2016 |

Research Methodology

Every research report issued by BondAdviser includes a clear recommendation - Buy, Hold or Sell - on the security. Thisrecommendation framework is designed to help investors navigate different investment opportunities by identifying the marketprice, yield, term to maturity, liquidity, volatility and risk.

The guide below may help you understand our research opinions. For further information on our research approach, you can referto our RG79 statement by clicking here.

Research Opinions key

• Buy - Over the next 12 months, the analyst expects the security to outperform the current yield due to credit spreadtightening or favourable movements in the underlying yield curve.

• Hold - Over the next 12 months, the analyst expects the security to provide stable returns broadly inline with the currentyield but with little credit spread tightening.

• Sell - Over the next 12 months, the analyst expects the security to underperform the current yield due to credit spreadwidening or adverse movements in the underlying yield curve.

• Suspended - The recommendation has been suspended temporarily due to the disclosure of new information or marketevents that may have a significant impact on our recommendation. This also includes situations where we have been givennon-public information and we need to temporarily suspend our coverage in order to comply with applicable regulationsand/or internal policies.

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Analyst

Nicholas YaxleyCredit [email protected]

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Research Report


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research report · 2020. 9. 5. · report created on 2 may 2016 issuer name peet limited security...

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