Sandon Capital Presentation On Fleetwood Corporation Limited

Fleetwood Corporation Limited description

  • Fleetwood provides manufactured accommodation solutions across multiple end markets including the affordable housing, education, commercial and mining sectors. As an extension of this, the company owns the Searipple accommodation village in Karratha, Western Australia. Fleetwood also manufactures recreational vehicles, utecanopies and trays, and distributes caravan parts and accessories
  • The company reports two operating segments:
  • Manufactured Accommodation –100% FY15 EBITDA
  • Recreational Vehicles –loss making in FY15
  • The company has a market capitalisation of ~A$110m
  • The balance sheet is good shape with minimal net debt following the sale of Osprey Village

Investment thesis – Time to “Deliver the Promise”

  • FWD sum-of-the-parts is worth significantly more than its current market value
  • The company’s overriding objective is to “outperform financially by providing genuine value”.1A bloated Balance Sheet with a significant number of assets earning sub-economic returns is the antithesis of this objective. In Sandon Capital’s view, assets that do not deliver acceptable returns through the cycle should be sold or closed
  • The growth in manufactured housing estates (MHEs) should provide a significant tailwind to the manufactured accommodation business for the medium term
  • The caravan manufacturing business has been loss making for 3 years whilst competitors are profitable and growing. The status quo needs to change
  • The Searipple accommodation village is a property asset housed within a manufacturing company. Consideration should be given as to whether this asset is retained or is worth more to a ‘natural owner’
  • The company has very little net debt and $25.7m (42cps) of franking credits, which would allow a significant of amount of excess capital to be returned to shareholders tax efficiently

Investment thesis – Sum-of-the-parts

  • FWD sum-of-the-parts is worth significantly more than the current market value
  • Sandon Capital believes that the combined value of the assets other than Manufactured Accommodation are almost equivalent to the current enterprise value of the company. These assets include:
  1. Bocar/ Flexiglass
  2. Camec
  3. Osprey management agreement
  4. Searipple
  5. Excess working capital
  6. Caravan manufacturing
  • In effect, investors who buy FWD at current market prices are buying the Manufactured Accommodation business for negligible value
  • Sandon Capital believes this is the best business within FWD as it has attractive growth opportunities
  • The table below does not ascribe any value to the $25.7m (42cps) of franking credits currently held by FWD

Sandon Capital Fleetwood Corporation Limited

  • The waterfall chart below highlights the impact to last reported net tangible assets (NTA) from taking significant write downs to a number of FWD assets
  • Adjusting for punitive write downs to estimated asset values, the current share price is trading in line with Sandon Capital’s estimate of “Scorched Earth” NTA

Sandon Capital Fleetwood Corporation Limited

Investment thesis – Closing the gap between price & value

  • To close the gap between share price and value, Sandon Capital believes there are several opportunities that management should consider:
  1. Address the company’s bloated balance sheet by selling or closing assets that fail to earn a decent return through the cycle:
    a)The “turnaround” effort in caravan manufacturing have been ongoing for 3+ years. The business should be sold or closed if profitability can’t be achieved in the short term
    b)Close WA Manufactured Accommodation if profitability can’t be achieved
    c)Reduce working capital
    d)Reduce capital expenditure to minimum levels
    e)Return cash to shareholders tax efficiently using surplus franking credits
  2. Take advantage of the growth opportunities in Manufactured Accommodation

Capital management – Bloated Balance Sheet

  • FWD’s Balance Sheet is heavily burdened with assets earning sub economic returns
  • Disappointingly, many of these assets have not generated an adequate return for a number of years
  • In the 13 years to 30 June 2015, the company spent $355 million on capital expenditure and grew total assets from $112 million to $328 million
  • Over that time, net profit has almost halved from $7.6 million in FY02 to $3.9 million in FY15. The company will struggle to earn a profit in FY16, following a loss of $5.1 million in its first half
  • Sandon Capital believes that the assets that can earn an economic return through the cycle should be retained, whilst those that can’t should be jettisoned
  • The Balance Sheet has continued to expand as earnings have dropped precipitously. Sandon Capital believes that significantly improved earnings can be generated from a substantially reduced asset base

Sandon Capital Fleetwood Corporation Limited

Capital management – Capital release

  • The company has started to release capital through the sale of Osprey Village in mid-2015, however significantly more work needs to be done to ensure the asset base is reduced and earnings power is improved
  • Sandon Capital sees several opportunities to materially improve the company’s earnings and return profile:
  1. Return caravan manufacturing to profitability or close / sell the business
  2. Return Western Australian manufactured accommodation to profitability or close the business
  3. Reduce working capital
  4. Reduce capital expenditure to minimum levels
  5. Return capital to shareholders

1. Return caravan manufacturing to profitability or close / sell the business

  • Based on public comments made by the company, Sandon Capital estimates that the caravan manufacturing segment lost close to $10 million in FY15
  • The “turnaround” efforts in this segment have been ongoing for 3+ years with little traction seen in improved financial performance
  • Sandon Capital believes that if the caravan manufacturing business does not return to profitability in the short term, the business should be sold or closed
  • This would immediately result in a significant uplift to earnings as the losses are cauterized
  • Should a sale become the best course of action, Sandon Capital believes the proceeds received should be used for capital management purposes

2. Return Western Australian manufactured accommodation (WA MA) to profitability or close the business

  • Sandon Capital estimates the WA MA segment lost close to $5 million in FY15. High fixed costs were not reduced sufficiently to offset rapidly falling revenues as demand from the mining industry for SPQ’s (dongas) slowed
  • The business was restructured in FY15 and again in 1HFY16 to align costs with diminished revenues
  • Sandon Capital believes there are significant opportunities to supply manufactured accommodation to the education, lifestyle retirement and tourism industries in WA
  • However, if management is unable to execute on these opportunities, the business should be closed, as we do not believe the significantly reduced demand from the mining industry is sufficient to support a Manufactured Accommodation presence in WA

3. Reduce working capital

  • Net working capital carried by FWD at 31/12/2015 is historically high at >$50m
  • Given the current reduced level of sales, working capital should be reduced significantly in the short term
  • Sandon Capital believes that one area in particular need of attention is the significant amount of mining dongas currently held in inventory (~400 valued at ~$15m)

Sandon Capital Fleetwood Corporation Limited

4. Reduce capital expenditure to minimum levels

  • Since 30 June 2002, Fleetwood has spent $355 million on capital expenditure. This is equivalent to 217% of D&A and 8.6% of sales revenue
  • With significant excess capacity across all of its segments, Sandon Capital does not see the need for material investment in the business. Capex should run well below D&A resulting in FCF materially above reported profits for the foreseeable future

Sandon Capital Fleetwood Corporation Limited

5. Return capital to shareholders

  • Fleetwood has a long history of returning capital (and franking credits) to shareholders through normal and special dividends
  • The dividend has been significantly reduced as earnings have deteriorated, to the point that no dividend was paid in FY15 and 1HFY16

Sandon Capital Fleetwood Corporation Limited

  • With the sale of Osprey returning the Balance Sheet to a sound position with minimal net debt, Sandon Capital believes the company is in a position to recommence paying dividends
  • Based on last reported retained earnings of $14.4m, the company has the capacity to pay fully franked dividends of 23cps. After paying a dividend of this size, the franking account would retain a balance of $19.7m (32cps)
  • With the share price currently trading at a significant discount to NTA, an off market, equal access buyback with a dividend component would be a good way to return cash to shareholders and increase tangible value per share

See the full presentation below.