Impact Homes has provided a 3Q16 update. The group is performing in line with budget and expects to meet or surpass its FY16 EBITDA forecast of $17.2m, a circa 40% increase on FY15
We believe that Impact Homes (Impact) 2021 8.50% amortising fixed rate bonds offer good relative value. Using management forecasts, gearing is expected to reduce as the bond amortises ($4m per annum) and Impact completes its sales pipeline generating additional profits and increased retained earnings. Declining maintenance covenants are in place to maintain this deleveraging. Bondholders are in a senior secured position, with the main asset being property inventory, which is covered by Home Warranty Insurance. At 31 March 2016, inventory increased by 84.6% to $61.3m and net tangible assets increased by 18% to $24.2m compared to FYE15. We also note that the broader bond market has rallied while Impact’s bonds have remained relatively unchanged at around par.
Impact’s 3Q16 update can be viewed here.
Financial summary
Financial results for the nine months to 31 March compared FY15 are detailed below.
| | FY15 | 9 months to 31 March |
| Total revenues | $102.2 | $132.0 |
| EBITDA | $12.3 | $11.6 |
| Net operating profit before tax | $8.6 | $7.9 |
| Operating profit after tax | $7.0 | $6.3 |
| Inventory | $33.2 | $61.3 |
| Tangible assets | $64.0 | $82.1 |
| Net tangible assets | $20.4 | $24.2 |
| Total debt | $19.1 | $41.7 |
| Equity* | $22.8 | $28.5 |
| Debt/total tangible assets | 29.8% | 50.8% |
*Including subordinated shareholder loans
Source: Company reports
- Impact is performing in-line with its budget year to date. EBITDA of $11.6m is 5.6% below budget while NPAT of $7.9m is 6.8% above budget. During the nine month period, there were 624 lots sold, 87 ahead of budget. Management commented that April EBITDA and net profit were $2.2m and $1.2m, respectively. These results bring the group back in-line with budget after the previous weaker results
- The lower than budgeted EBITDA was due to delayed settlement of more profitable townhouse lots all of which are due to settle within the next two months. This is not unusual as settlements timings are hard to predict
- The business is cyclical and typically experiences stronger growth in the run up to 30 June. Impact therefore expects to meet and possibly exceed its full year FY16 EBITDA forecast of $17.2m (FY15 was $12.3m)
- Importantly, forward contracted revenue increased by 29% to $134.4m as at 8 May 2016 from $103.9m as at 30 November 2015. An estimated $60.6m of this will be earned in FY16, with the balance due in FY17
- Impact’s key residential markets are performing strongly, due to supporting demand for both its owner occupier and investor product. The Coomera/Pimpana region between Brisbane and the Gold Coast has been further buoyed by the commencement of construction on the long delayed $1bn Westfield Coomera Town centre project with strong population growth also resulting in the opening of two new schools in the area. In relation to the North Lakes area north of Brisbane, a number of key developments are due for completion in 2016. This includes a new rail line from Petrie to Kippa Ring and the third stage of a Westfield centre which includes a 28,000sq IKEA Super store
- Broader economic conditions remain supportive; lower mortgage interest rates are positive. Politically, the Liberal Party has confirmed it won’t make any changes to negative gearing or capital gains tax, while the Labour Party’s policy to remove negative gearing on existing properties should actually prove to be a benefit to new home builders like Impact. The company also advises the tightening of bank lending policies for foreign investors should not have a significant impact as it is not its target market
- Gearing (debt/total tangible assets) was 50.8% at 31 March 16 and remains below the 55% covenant level for FY16. Gearing is forecast to reduce as the bond amortises and Impact completes its sales pipeline generating equity. We note that gearing covenants reduce to 45% in FY17 and 40% in FY18. The covenants are ‘maintenance based’ meaning if breached, Impact must repay debt to remedy the situation
- The primary asset on the balance sheet is Inventory (which represents costs spent to date less claims received plus profit claims in accordance with accounting standards). All of Impact’s home construction business is covered by home warranty insurance. If Impact was to go into administration, the insurance body would manage the completion of each home and both Impact and that builder would get paid for the work they each completed. As such, in a liquidation type scenario, it is our expectation that the stated inventory figure should be close to the realised value
- Impact has also made its first quarterly interest and principal ($1m) amortisation payment
Bondholders have a first ranking mortgage over the following joint venture developments. An update on the progress is given below.
| Development | Progress |
| Lot 300 Redbank Plains Rd, Bellbird Park, Qld 4300 (Bellbird Villas Pty Ltd) | 16 town houses. 4 unconditional contracts, 8 under contract |
| Lot 34 Littleton Rd, Richlands, Qld 4077 (Littleton Villas Pty Ltd) | First stage of 27 units under construction. Second stage includes a further 42 |
| Lot 4 Herbert Rd, Carrum Downs, Vic 3201 (Melb Investments Pty Ltd) | Land is due to settle this month with construction scheduled for July |
| Lot 37 Crossacres St, Doolandella, Qld 4077 (Second Ave Developments Pty Ltd) | Five units remaining to settle |
Source: Company reports
Relative value
At current levels, we believe Impact’s 2021 fixed rate bond is offering good relative value; with investors compensated for the additional risks by the higher trading margin.
The following chart details the trading margins of various high yield property companies.
Impact’s 2021 fixed rate bond is indicatively offered with a yield to maturity of 8.34%*.
Available to wholesale clients only with a minimum face value of AUD10,000.
*Accurate as of 24 May 2016 but subject to change.