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Date : 19/07/2021

Finbar Group

ASX :

FRI

Market Cap : $247.63 Million

Dividend Per Share : $0.02

Dividend Yield : 4.39 %

Buy

52 Week Range : $0.61 - $0.96

Share Price : $0.91

Amid the booming property market, Finbar is an excellent growth + dividend play. A "Buy" from us.

Company Analysis

The property market in Western Australia and particularly in Perth is booming. Finbar Group (ASX: FRI) is the leading property developer in the region. They are a veteran in its division that owns not less than 75 landmark WA apartment developments. Finbar also has an impressive track record of 100% deliveries on more than six thousand apartments that are worth more than $3 billion since its beginning in 1995. This is a unique opportunity to gain exposure to a growing property market in the Western Australian region. Perth’s property market took off remarkably, boosted by the amazing performance of the state’s mining industry amid soaring demand and high commodity prices.

Western Australia has shown incredible resilience during the pandemic and it has supported the housing market in the state which saw its fastest rate of growth in fifteen years as rental prices hit the roof to a six-year high. We think that with the return to normal coupled with the booming resources industry which recently reported record sales, the demand for housing will likely continue to skyrocket. What better than Finbar to get involved in this growth prospect. Here are our top reasons:

  1. Profit growth: the property developer expects to report a net profit after tax (NPAT) of $8.4 million by the end of FY21, which is an 18% increase year-on-year. The rise in profit reflected Finbar’s sales growth with 486 completed and off-the-plan apartments worth $296 million sold during the financial year.
  2. Exposure in a booming market: Perth apartment sales increased by 58% year on year and is likely to keep going supported by the thriving resources industry.
  3. Solid dividend on the rise: Finbar has announced its intention to issue a fully franked second-half dividend of two cents per share which represents a lucrative 4.54% dividend yield.
  4. Bullish momentum: Finbar share prices reflected the company’s strong fundamentals and appreciated by almost 17% year-on-year and about 7% year to date.
  5. Insiders buy shares: Generally when a director is increasing its shareholding, it is a good sign. It shows how confident the management is regarding their business. And that is currently the case. During the previous month, one of Finbar’s directors increased their interest in the company by more than 10% among other key members of the board of directors.

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Source: Tradingview.com

Finbar earnings growth leveraged by its impressive wide range of property developments and a favourable market demand

Finbar saw its profit improve during FY21 which was built upon good sales driven by the booming property market in Western Australia. The firm sold 486 completed and off-the-plan apartments during the financial year, totalling a value of $296 million. Finbar also has a fair amount of cash available and reported more than $52 million at its disposal. The ample liquidity will allow the company to invest further in its future developments as well as to comply with its dividend policy. What we also like about Finbar is its stable and robust balance sheet. The group’s total completed stock value was $59.9 million, which compares to a sell-down of $137 million in debt-free stock completed the financial year. We have seen as well during the period, Finbar bolstering its cash position, thanks to a strong cash flow from completed stock settlements and increased confidence of improving operating conditions. Dividend growth is also coming back, and the group announced a second-half dividend of 2 cents per share, fully franked. This follows an interim dividend of 2 cents as well, announced earlier in February which now brings the full-year dividend to 4 cents per share. Finbar is not new on the block, we have seen throughout the years quality execution and discipline in the management of projects time and budget. Actually, FY21 was an exceptional year in which the group was benefiting from the strong demand for completed apartments in the Perth market and also from the good progress on delivering its existing projects under construction.

Finbar’s high demand leads to stock shortage

Finbar’s apartments are enjoying high demand and the group continues to operate in a strong completed apartment stock sale environment. Taking in consideration the current sales rate, Finbar has estimated its available completed residential apartments supply to be approximately three months. The group is actively working to resupply its diminishing stock pipeline and in fact, one of its projects named Dianella is just a few months away from completion which is already well-received by the market.

Great demand is boosting the firm’s liquidity which saw its available cash position reaching more than $52 million. The available cash puts Finbar in a position to conclude all equity funding requirements for its major ongoing apartment projects named “Civic Heart” and “AT238”. Furthermore, the group is committed to the commencement of the “Aurora” project in Applecross and “The Point” in Rivervale on FY22.

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Source: Finbar

89% of Finbar’s earnings comes from the sales of its property development projects. The company collected income from nine completed projects. The residual 7% comes from its investment portfolio in which the company collects rental earnings. We like the idea of rental earnings as it is a recurring source of income which we have witnessed gradual expansion throughout the last two years at a CAGR of 22%.

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Source: Finbar

Company Updates

FY22 outlook: Three projects near completion and nine projects in progress

To tackle the strong demand, which is likely to continue onward FY22, Finbar is already working on new projects, which currently three are under construction and very near completion, the Dianella, Civic Heart and AT238.

Finbar’s 128-apartment development in Dianella, in Perth’s inner northern suburbs, is nearing completion with settlements of the wholly-owned project expected to begin in September. Sales at Dianella have reached $27 million. Construction at the company’s and Western Australia’s largest residential project to date, the 335-lot Civic Heart, is on track with the below-ground structural engineering works reaching completion and basement excavation works now underway. Sales at Civic Heart stand at $105 million with Finbar holding a 55% interest in the project. Construction at AT238, a 121-lot apartment building in the east of Perth’s CBD, is also progressing well, with ground floor raft works complete and the structure now commencing above ground floor level. Pre-sales at the development are currently at $21 million.

According to our analysis, we expect Finbar to continue to deliver strong earnings growth as we are projecting $153.9 million onward FY22 and $406 million onward FY23 through the sales generated from Dianella, Civic Heart and AT238.

On top of the three projects which are under construction, Finbar has also received development approval from three lucrative projects which are valued at $381 million, along with six projects currently under planning and design worth approximately $490 million.

Investment Thesis

Finbar earnings growth underpinned by the underlying growth of the mining industry in the region

Finbar is well-positioned in the region. Hence, the company has been around for a while in Western Australia and is leading the residential property market with a few development projects in Perth. The last financial year was an amazing period for the company as its sales were propelled by the strong demand bolstered by the tremendous growth of the resources industry in the region. Western Australia is the number one iron ore supplier in the world, accounting for 39% of the global supply in 2020, far in front of Brazil, China, and India which account for 17%, 12% and 8%, respectively. Despite being producers, Brazil, China, and India retain most of their production for their domestic use. The Asian continent represents 80% of the global iron ore demand in 2020 which rose by 2% during that period. Demand for iron ore will remain lower from China, however, the demand from the rest of Asia will continue to grow steadily in the next two decades which will offset the Chinese lower demand. Furthermore, the price of iron ore is also on a rise, 16% since last year which contributes to the earnings growth of the resources industry. The thriving mining sector is a strong catalyst for the property market in the region driven by a strong employment/population ratio and therefore, demographic growth which is on the way up by a CAGR of 1.28% for the last five years.

Finbar is possibly experiencing a shortage in its available apartments stock due to strong demand for residential properties. The company has reported that it might run out of apartments for sale in the next three months at the current rate of sale which attests to the success of the business. To respond to the strong demand, Finbar is already working on nine developments with three projects near completion expected for FY22 and FY23.

Insiders increasing their stakes

Another positive outlook that gives us strong confidence in Finbar is the recent increase in stakes from the company’s director. Usually, when directors are increasing their interests in the company it is often a bullish signal. Hence, who knows better what is going on than insiders themselves? Insiders often buy shares when they believe their company’s stocks are undervalued.

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We have found unusual shareholding activities among the Executive Directors which increased their interests in the company during the second half of FY21. A pretty good sign indeed.

20 projects supporting a potential strong earnings growth

Seven completed constructions will contribute to a potential of $77 million in sales from the remaining available apartments stock along with three projects under construction which are near completion, expected for FY22 and FY23. These three new projects, Dianella, Civic Heart and AT238 will contribute to a total of $560 million in earnings onward FY22. And finally, the remaining nine projects which are currently under development are forecasted to bring about $874 million of future earnings. According to our analysis, Finbar has the potential to generate more than $1.5 billion in earnings in the next decade.

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Since the last three years, Finbar has maintained a median EBITDA margin of 10.4%. EBITDA margin has been considerably affected due to the unprecedented situation of COVID-19 throughout FY20. We expect the company to steadily improve its margin as we forecast for the upcoming years an EBITDA margin at an acceptable level above 7%. Conservatively, we are anticipating revenue growth at a CAGR of 5.1% in the next three years underpinned by strong demand in the property market. With a projected solid earnings growth, subsequently, we expect dividend growth on top of the current 4.54% annual yield.

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Finbar has been pretty bullish since the COVID-19 global market sell-off in March last year. FRI shares have since been appreciated by a remarkable plus 70% reflecting the strong prospect of the company. Despite a relatively higher P/E ratio and EV/EBITDA compared to the broad market, we believe it is perfectly justifiable vis-à-vis the future growth potential of the company. It has even been recognised by the Board of Directors of the company, which recently some of the Executive Directors increased their stakes in anticipation of further appreciation of FRI shares. With a conservative earnings growth of 5.1% compound annual growth rate expected for the next 3-year period and a relatively stable EBITDA margin, we are confident in Finbar’s future performance.

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Technical Analysis

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Trend

FRI has been considerably bullish since the market sell-off in March last year due to the first COVID-19 global outbreak. FRI went back up from its lows around 50 cents per share back above 80 cents per share with an impressive plus 70% rebound. Since March this year, FRI has been consolidating and forming a pennant pattern which is a positive sign given the technical pattern representing market participants building up their positions in anticipation of a breakout rally. During that period, between March and June, three Executive Directors bought a fair number of shares at various price levels. We have found that the average entry price coincides as well with the price equilibrium at 85.5 cents per share.

Key price levels

We suggest watching the 85.5 cents as we think that many market participants are looking to enter trades at this level which is a relatively fair price.

Volume and momentum

Volume slightly decreases since the last 200-day with the 20-day volume average down by -5.9%. The price action remains bullish in the near term, evolving in a range between 80 cents and 95 cents per share.

Trade consideration

  • Market participants might be interested to enter their trade positions at the current price equilibrium at 85.5 cents per share
  • Primary target price above $1.0 per share
  • Secondary target price at $2.0 per share
  • Consider reducing exposure below 80 cents per share
  • It is recommended exiting the trade below 75 cents per share

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Recommendation

The property market in Western Australia is booming and it is likely to continue onward FY22. Finbar is the leading residential property developer in the region. The firm owns a wide range of projects and is actively developing new ones. According to our analysis, we expect Finbar to continue to deliver strong earnings growth as we are projecting $153.9 million onward FY22 and $406 million onward FY23 through the sales generated from Dianella, Civic Heart and AT238. On top of the three projects which are under construction, Finbar has also received development approval from three lucrative projects which are valued at $381 million, along with six projects currently under planning and design worth approximately $490 million. Finbar has been around the block for some time. With a quality and experienced management team, a proven track record of success along a favourable sales environment, we can only see positive things for Finbar, therefore, we recommend long-term investors to “Buy”.

 

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