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Companies
The rise of the grey nomads
Trevor Hoey, July 16 2007
As the new millennium ticked over, the Y2K myth was busted and tech companies started falling like flies investors approached the market with a degree of caution. Distinctly there was a need to understand the functions of the company, the markets it operated in and how to gauge its earnings potential. In many cases this meant a return to traditional companies that had previously been discarded.
As the Australian share market continues to break all time highs, these issues should be at the forefront of investor’s minds, as there are certain sectors where euphoria rather than clear objective thinking appears to be driving investment decisions. Taking a lead from Fleetwood Corporation, one of the post-millennium success stories, it would appear that two similar businesses that have been listed on the ASX for less than 12 months could be emerging success stories.
Between 2001 and 2004, Fleetwood’s share price increased from $1.20 to $9. While a reorganisation of the business and the integration of a number of acquisitions halted Fleetwood’s growth in 2005-06, it is back bigger and better than ever with its share price recently eclipsing the $9 mark for the first time since 2004.
Fleetwood manufactures and distributes caravans and parts under leading brand names such as Windsor, Coromal, Flexiglass and Camec. The company also has a manufactured accommodation business that supplies and installs park homes, cabins, transportable homes and portable housing that is used in the mining industry and for other remote area facilities.
Fleetwood is ideally positioned to cash in on three key trends that are in full swing and arguably have more upside to go – resources, retirement and recreation. But Fleetwood is a relatively mature business, with average annual earnings per share growth of about 13 per cent expected between 2007 and 2009.
The two recently listed businesses that bear certain similarities to Fleetwood are Nomad Building Solutions and The Mac Services Group. Importantly, the businesses, their markets and earnings outlook can be clearly identified. The key point of difference between these two businesses and Fleetwood is that they focus on the provision of manufactured accommodation.
Taking a simplistic look at the three businesses, the fact that Nomad and Mac are not exposed to the caravan industry is arguably a plus. In 2005-06, Fleetwood’s caravan operations produced a flat result, while the manufactured housing business experienced earnings growth of 24 per cent on the back of strong demand from the resources and retirement sectors.
So if Nomad and Mac are the pick of the three, which of the companies present as the better investment? Nomad and Mac trade on P/E rations of 20 and 22 respectively, relative to 2007 consensus forecasts. Mac is a leading provider of mining accommodation in the Bowen Basin where its clients include Macarthur Coal, BHP Billiton and Leighton Contractors. While the growth outlook for the coal industry is strong it could be argued that Mac needs to branch out into new geographic areas to generate the level of growth that a P/E ratio of 22 demands.
By comparison, Nomad has a more diversified business. The company’s acquisition of McGrath Homes has strengthened Nomad’s ability to expand its park homes business. Nomad is active in Western Australia and Queensland, with high profile clients such as Rio Tinto, BHP and Fortescue Metals.
Nomad has proven that it can compete with the company’s peers in winning large contracts within the mining industry. Most notable was the award of a contract to provide a Woodside Petroleum joint venture with a 1500 person accommodation village in Karratha. The contract is worth $15 million initially with an end value of about $60 million.
Consensus forecasts indicate that Nomad will achieve profit growth of 37 per cent in 2007-08, representing earnings per share of 18.5 cents, reflecting a P/E ratio of 15. Nomad’s management has indicated that the 2006-07 result will be well ahead of prospectus forecasts and it recently upgraded the guidance provided for 2007-08, supporting analyst’s confidence in the company’s growth strategy.
More articles from this week's newsletter:
ANZ: will the new CEO sing in tune?
Trading: is your bargain stock a lemon?
What is the ideal mix of companies?
Investing in a toppy market
Are investment clubs good for your wealth?
Stock of the week: TPI
Inflation: when is 'core' not so core?
CFDs: the best time to trade
Analyst report: gold bull seasonals
Investing: Paying the cost of confidence
Whatever your views, you can discuss this article - or any of Trevor's articles - on our message board Your 2 Cents.
Trevor Hoey is one of Australia's leading finance journalists, having written for Shares, Personal Investor and BRW magazines. Trevor's broad contact base enables him to find out - and report on - the real story behind what's happening at Australian listed companies. Trevor writes for the Australian Financial Review and AFR Smart Investor magazine.
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