Balwin Properties (BWN) listed just over a year ago, and has seen its shareprice perform poorly, dropping from an IPO price of R10.20/share, to a low of R6/share and is now trading at approximately R7.50/share. Balwin develop large scale residential complexes with 1, 2 and 3 bedroom apartments, which they for R750k – R1.5m. Their strength is on focussing in development nodes in Gauteng and the Western Cape and aiming at middle income, young, first time buyers with an offering of security, lifestyle and quality finishes.
Their recent interim results were impacted by accounting challenges related to the late registration of units, but management is confident that this will be resolved for the full year results. Making adjustments for these impacts, and annualising the results, BWN currently trades at a PE of 7.5 and a healthy dividend yield of 4.5%. BWN will sell approximately 2500 apartments in the financial year at an average selling price of just under R1m/unit. Their margin is excellent at 40%, due to the economies of scale that they achieve in their large developments (500-1000 units).
BWN has secured land – particularly in Gauteng – for 35,000 units in the next 10 years or so. If we assume that their selling price and margins remain the same and that BWN will register an average of 3000 units per year in the next years, then the company has a secured annual EBITDA of approximately R2.60/share and estimated Earnings per Share of R1.50/share.
The following reasons outline why I feel that these healthy earnings are fairly secure and that BWN should be regarded as a cheap buying opportunity at these levels:
- First Time Buyers and Emerging Middle Class
I live in a Balwin estate, which bought straight from the developer. The bulk of the fellow home owners in the estate are young, first time buyers and professionals, reflecting Balwin’s target market very accurately. The chart below from the Actuarial Society of Southern Africa shows the forecast of South Africa’s youth bulge, the young age group that is likely to be a first time home buyer in a Balwin development. Clearly, this demographic is growing and peaking in the next 10-20 years.
According to Stats SA, 56m people lived in South Africa in mid-2016, of which 13.5m live in Gauteng. This is up from just under 55m and 13m respectively in mid-2015, representing an increase of 1m people in South Africa in a year, half a million of which in Gauteng alone. A combination of fertility, migration from other countries and urbanisation (migration from other provinces) will continue to drive rapid population growth in Gauteng.
Assuming that this trend continues, SA’s population will grow by 10m in the next 10 years, with Gauteng growing by 400,000 – 500,000 people per year. Balwin stands to benefit from this growth, as their future development is heavily focused on Gauteng. If Balwin sells, 3,000 units per year, with an average occupancy of three people per unit, they will still not even be available to provide housing to even 1% of the added population in the nation. In this context, BWN’s rate of development is minimal and should be easily absorbed.
There is a growing demand for safe residential estates, to replace standalone houses. Increasing rates, taxes and utilities and decreasing incomes are also supporting a trend towards downscaling. With people choosing smaller apartments closer to work over houses in the suburbs.
- Lack of available land
Balwin has secured a large tract of land for development in the Waterfall node. This is some of the last available land in Gauteng that is available for large scale developments.
- Crystal Lagoons
Balwin’s CEO announced recently that they will be the first developer in the country to integrate Crystal Lagoons into their estates. This is a technology that has been pioneered in Chile, which significantly reduces the costs of large scale swimming pools, to the extent that lagoon or lake style water resorts can be developed around a very large man made clear water pool. Pictures of precedent developments are abundantly available on the internet. I find this type of development extremely exciting and would certainly consider an estate with this type of infrastructure. I am convinced many South African consumers will pay a premium for this.
- Shareholding by Management
I am always a fan of large shareholding in the hands of management, as this ensures that their incentives and interests are aligned with those of shareholders. Balwin is particularly impressive, with directors holding just over 47% of the shares and CEO Steve Brookes alone holding 35% of the issued shares.
Balwin is committed to maintaining their margin. If they do not achieve their desired selling price, the company prefers to rent properties, until the market in that particular area changes. At the BWN cost of construction and going rental rates, I estimate that BWN achieves net rental yields in the order of 12-13%, significantly above the cost of debt. This means that BWN, can happily sit on their completed units, without compromising on their price expectations. Management has alluded to the possibility of spinning off their rental portfolio into a REIT at some time in the future, if the property market does not turn.