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Friday, 6 July 2018
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Buy Hold Sell: Cedar Woods

This is a stock we hold in the Marcus Today Income SMA. We are up (just) 3.7% on our holding and it has recently turned up as a buy on the chart scans. Let’s have a quick look - it is for income investors.

Cedar Wood Properties (CWP)

The company is a property developer established in 1987 and listed since 1994, Head office is in Perth. They have projects in Western Australia, Victoria, Queensland and South Australia. Their focus is residential property development with 27 projects completed or in progress across mostly WA and Victoria.

Their annual report has photos of every project. They are basically building residential properties.

CWP makes noises about keeping shareholders informed and as a result they manage expectations pretty well. They put an announcement out yesterday saying they expect a strong uplift in profit for 2019 with a significant number of settlements happening in May and June which underpin 2018 net profit forecasts. They have full year results in August. They predict a “solid” result on the back of a busy final quarter for settlements and sales. The CEO was quoted as saying “The level of sales and the progress we are making across our portfolio is particularly pleasing and provides a strong platform for FY 19 and FY 20”. He also said that the company is well positioned with presales of more than $320 million settling in 2019 compared to $260 million this time last year. In addition there is $58 million worth of settlements due from 2018 presales. “These presales substantially de-risk earnings for FY 2019 and are expected to drive a strong uplift in net profit”.

In other words they are very low risk running into results in August. Last year’s results reported a record earnings number for the seventh consecutive year and a record dividend. The dividend is 100% franked.

Here are the numbers. It is a $490 million market cap company (small). Return on equity is between 10 to 15% and rising. They are trading 45% below intrinsic value and 10% below the average broker target price. They are currently 7% down from the year high 28% up from the year low.

There is not a lot of research around although Morgans has a HOLD recommendation this morning with a 670c target price which is 8% above the current share price of 616c.

This is the five year chart showing the stock in a long-term uptrend and recently bouncing from the bottom of the trading range, which is why it turned up on our chart scans.

Drivers are obviously tied to the fortunes of the residential property market in the States in which they operate which is mostly WA and Victoria. The share price has underperformed recently as the heat came out of the property market and the royal commission has targeted mortgage brokers and banks making loans more difficult to negotiate as lending regulations tighten. WA is a recovering State with the resources sector fortunes improving over the last year.

The company is insulated to some extent by its lack of exposure to the New South Wales market where property prices are more volatile and have fallen 4.2% in the last year.

Conclusion – CWP are a cheap looking income stock on a PE of just 12.1x and a yield of 6.7%. The yield is 100% franked. It is looking undervalued on a 45% discount to intrinsic value and running into results it is very low risk having communicated earnings expectations in the last 24 hours. It’s not the sort of stock I would be putting into a growth portfolio considering the issues with mortgage lending and a cooling property market, but a lot of that rather mild property market fear is already discounted. I hold it in the income SMA and am happy to do so running into results, but the focus is on income, with the chance, after the recent performance, of a capital gain if it retains this 2 ½ year uptrend. Hopefully it does what an income stock should, pay a reliable yield and trend slowly up with the earnings and dividends constantly increasing by a respectable but unexciting manner.

The major risk is some property market collapse which occasionally hits the headlines but is unlikely.

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