BWN – The cheapest company on the JSE?

 

When I first wrote about Balwin Properties (BWN) in 2016, they were planning to sell approximately 2000-3000 apartments per year and I predicted that they would have earnings of around R1.50/share which would hopefully underpin a healthy share price and dividend. Part of this prediction has spectacularly backfired. The BWN share price is down 70% and they have stopped paying a dividend. Nevertheless, management have followed through on many of their key promises and I believe the company is well positioned to continue earnings, improve cash flow and patient shareholders should be handsomely rewarded at current depressed prices.

When Balwin listed in 2015, they needed money to acquire a large tract of land in Midrand to secure a 10-15 year development pipeline, they intended to grow outside of Gauteng, they were planning to deliver apartments to a stand alone rental business by 2019/2020 and they were planning to sell around 2500 apartments by year. Management has delivered on all these promises despite a stagnant economy.

In their business update published on 14 March 2019, BWN suggest that they will sell approximately 2350 apartments in the 2019 financial year. They have also already pre-sold 1000 for the 2020 financial year. I am not at all surprised by this. In February, I visited the Blyde in Pretoria, sub-Sahara Africa’s first crystal lagoon. It is an astonishing development that appeals to the middle-income family (see photos). The scale is also fascinating. They expect to develop over 3000 apartments in this development alone. And access to the lagoon will make all these apartments appealing to buyers.

On my travels in December and January, I passed Balwin developments in Cape Town, Somerset West and Umhlanga, all popular fast growing nodes, showing that they have extended their popularity beyond Gauteng. I am confident that the popular crystal lagoon will be repeated in other areas in due time. BWN has established and owns a 25% share in Balwin Rentals, which will absorb certain developments over the next decade, earmarked specifically for rental. The first 252 apartments were sold to the partner, suggesting that only 10% of sales were to this entity at a slightly lower margin of 30%.

Despite delivering on their listing aspirations, the company share price has drifted to a point where it is ridiculously cheap. Stephen Brookes bought R1m of shares at the end of February at R2.50/share showing his belief that the company is undervalued. The market cap of R1.1bn is the same as half year revenue. Earnings are likely to be 95c, putting the company on an approximate forward PE of 2.5. Cash flow has improved and they expect to have R300m on hand. That is approximately 25% of the market cap in cash. Excluding cash, the company is trading on a PE of just over 2.

The fund manager Keith McLachlan argued that construction companies are uninvestable, as the margins are thin and due to risk that one failed construction contract could develop into a ruinous one (see Group 5). However, with current margins at 33% and targeted margins of 35%, I do not believe that this risk applies to Balwin. Furthermore, even if they fail to sell their apartments, they can simply roll them into their residential rental portfolio which they have previously set up.

They have land for a secured pipeline of over 46,000 secured. This will keep them going for the next 20 years, without the major outlay of further land acquisitions. The company is carrying an NAV of R5/share, twice the current share price. Surely, Balwin is the cheapest stock on the JSE and patient investors will be rewarded.

5 thoughts on “BWN – The cheapest company on the JSE?

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  3. I agree that Balwin serves a market that will benefit from the rise in the middle class which will require affordable housing. However, there are several points to consider about Balwin:

    1.
    Even though Balwin constructs apartments, it cannot be compared to Engineering and Construction (termed “Construction” by Keith) companies such as Aveng and Stefanutti Stocks since these companies are focused on complex construction projects such as building bridges and roads. Such companies are almost uninvestable given the characteristics of EPCm or EC contracts. For example, payments are always delayed and made when a milestone is reached. This means significant funds have to be invested upfront, thus the need for high working capital. Furthermore, due to the complex nature of the projects, its easy to get the project specifications wrong resulting in re-work or litigation to argue the contract terms (bad contract). Building apartments is not at all complex and since Balwin develops them for resale, they dont have to deal with complex customer technical specifications.

    2.
    Balwin is not at all cash generative even though it trades below its NAV abd has reported “accounting” profits. If you look at its financials for the last 4-5 years, you will realise the company has funded its dividend payments via debt. Most of the accounting profit reported by Balwim was invested in working capital such as land which is very difficult to source, hence the need to have it secure for future projects. This is not expected to change anytime soon since without land, the company has no business to run. Given this characteristic, Balwin’s reported NAV mainly consist of working capital (land) which might be difficult to be turned into hard cash for shareholders like yourself.

    On financials markets, investing in cigar butts might seem sensible but such an approach is not businessmen like and “hopes” that NAV will get unlocked into hard cash sometime in the foreseable future.

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