Neat and sweet, but trust in Oslo is a must

Transcription

1 Neat and sweet, but trust in Oslo is a must SELVAAG BOLIG INITIATION OF COVERAGE Recommendation: BUY Target NOK Prepared by Analyst: Daniel Johansson, Fondsfinans AS, tel: , dj@fondsfinans.no This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. This report is not a product of Fondsfinans Inc. See page 24 of this report for Important Disclosure Information. 1

2 Norway urban center profile, key customer segment focus BACKGROUND (1) - Norway s largest home developer - Industrial approach, low cost model - Flexible business model, not a builder! - Norway and urban center focus - Three defined customer concepts - Growing; land continuously added* «Its better to build 30,000 homes for NOK 15,000 each than building 15,000 homes for NOK 30,000 each» Olav Selvaag, founder ( ) Source(s): Selvaag, Fondsfinans research. Note: landbank actually down 1% q-o-q while a large project in Løren (400 units) is likely to to be added in 3Q 2

3 Smallest among peers, but growing with decent profitability BACKGROUND (2) MCAP, employees vs. peers (NOKk, n) Sales per employee, ROE (NOKm, %) % 70% 60% 50% 40% 30% 20% 10% 0% -10% 0 20,000 40,000 60,000 80,000 No. of employees MCAP (NOKm) Revenue/employee ROE (RHS) Selvaag is Norway s leading homebuilder, but dwarfed by peers - 2Q units started is just behind OBOS - MCAP: NOK 2.4b (EV: 4.5b); closest peer JM NOK 16.1b (NOK 15.3b) - Dwarfed by pure construction names Source(s): Selvaag, Blomberg, Fondsfinans research Selvaag growth is stabilizing proven model, and is cost efficient - Revenue/employee increasing y-o-y - Margins up but rapidly shifting due to starts/sales/completions fluctuating - ROE c.15-20%; OK but below peers Source(s): Selvaag, Fondsfinans research 3

4 The Norwegian house buyers still enjoy the good days MACRO PICTURE (1) Norway deposit rate, lending, wage index* Norway market characteristics 12% 10% 8% 6% 4% 2% 0% Low risk for home builders (advance sales, binding offers) - Beneficial to own vs. to rent (tax deduction, newbuild duties) Norway lending growth Norway wage index (RHS) Norway deposit rate Norway macro risks are up, but home buyers are well supported - Despite record unemployment (4.5%) etc. wage growth (gross) continues - Key rates continue lower, lending up - In sum the affordability stands solid Source(s): Bloomberg, Fondsfinans research. *Index: 1Q08 = High level of home-ownership (incentives, savings schemes) - A balanced market approach (few buy-to-lets, plan regulation) Source(s): Selvaag, Fondsfinans research 4

5 Structural factors call for limited Norway housing risk ahead MACRO PICTURE (2) Norway population, housing completions Norwegian house prices*, housing starts 70,000 60,000 50,000 40,000 30,000 20,000 10, ,000 60,000 50,000 40,000 30,000 20,000 10, ,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Norway population growth Norway housing completions (RHS) Norway house starts (RHS) Norway house prices Population growth scenario intact more or less, housing supply short* - Oversupply risk low due to few plan approvals, urbanization, immigration - C. 30k completions is c.10k units short, Stavanger only place with inventory Source(s): Selvaag. *Example, available housing -29% y-o-y in 1Q15 Home prices continue higher, but housing starts still lagging - Price rallies move from houses to flats, new-used prices converging decoupling in prices vs. starts now reversing, but shortage evident Source(s): Selvaag, Bloomberg, Fondsfinans research. * Index: 1Q 2008 = 100 5

6 Not a builder but a home developer, taking only limited risk BUSINESS MODEL (1) Selvaag sales process and value chain Source(s): Selvaag 6

7 Margin/cash flow support from modules and efficiency BUSINESS MODEL (2) Typical on-site vs. module margins (%) Costs, cash items vs. sales (%) 100% 80% 60% 40% 20% 0% 12% 16% 400% 300% 200% 100% 0% 10% 8% 6% 4% 2% 0% -2% -4% -6% Construction cost Project management Cost of land Financial cost Margin OPEX/Sales NFI/Sales (RHS) NWC/Sales CAPEX/Sales (RHS) Flexible business model and modules secure good margins... - No construction unit in-house; EBIT margins c. 10 p.p. above peers - Modules (2Q: c. 40%) have low contract cost, margins +4 p.p. - Note: more on-sites done as of recent Source(s): Selvaag, Fondsfinans research... while better NWC management etc. should support cash flows - OPEX/sales slowly moderating while NWC cuts, lower NFI pay-off - Both margins/cash flows are volatile q-o-q and very volume sensitive - High sales ratios, increased activity! Source(s): Selvaag, Fondsfinans research 7

8 Solid demand, a growing backlog, decent visibility and GROWTH (1) Order backlog, y-o-y growth (NOKm, %) Sales ratio of production vs. covenant (%) 6,000 5,000 4,000 3,000 2,000 1, % 50 % 40 % 30 % 20 % 10 % 0 % -10 % -20 % 90% 85% 80% 75% 70% 65% 60% 55% 50% 90% 80% 70% 60% 50% Order backlog Growth, y-o-y Sales ratio Sales covenant, 60% Backlog supportive for the long term activity as risks increase,... - Backlog growth was negative, -6% y- o-y, but up q-o-q on the recent adds - B-t-b still at 1.4x, but down q-o-q... but so far sales ratios are robust, i.e. potential for more starts - 2Q sales ratio at 80%, i.e. some 20 p.p. higher than the covenant - Land (+13% y-o-y) to be put to use Source(s): Selvaag, Fondsfinans research Source(s): Selvaag, Fondsfinans research 8

9 while we forecast limited growth in E we see GROWTH (2) Sold units (FF) and revenues (n, NOKm) Units completed*, revenues (n, NOKm) Units sold/unit revenues (n, NOKm) 2015E 2016E 2017E Units sold* ,087 Unit reveneus 3,426 3,396 3,735 *Estimated based on starts and deliveries ,200 1, Units expected completed (backlog) Revenues (RHS) Soft guiding for completed units, cautious comments on starts... - We base our estimates on the 1,011 completions and 230 extra units sold/started until 3Q16E - Average unit price still c. NOK 3.3m Source(s): Selvaag, Fondsfinans research... result in us being conservative for the E period at least - We forecast 2,983 units to be booked as sold/built in E; i.e. Property revenues of NOK 10.6b - In all we see a 6% E CAGR Source(s): Selvaag, Fondsfinans research 9

10 a large potential in Oslo, where housing shortage grows GROWTH Oslo population and projection Oslo housing demand vs. supply (n) 800, , , , , , , , , , ,648 7,080 6,080 5,080 4,080 3,080 2, ,080 1, Oslo population Oslo newbuilds supply Olso housing demand A likely Oslo population increase of some 25k in E support - Stable birth rates for years, (labour) immigration and urbanization trends - Limitation on large scale newbuild*... the Selvaag potential as the housing shortage prevail - Annual need is c. 6.4k units while the market can provide c. 4k today - Flats to let est d at c. 3,000* units Source(s): Selvaag. *Note: demanding planning regulation plus a difficult topography Source(s): Selvaag,. *Note: available via Finn.no (Oslo + Akershus lettings) 10

11 Underlying margins up, returns set to be improving as well PROFITABILITY EBITDA, Adj. EBITDA, margins (NOKm, %) Returns measures and trend (%) % 15% 10% 5% 0% 14% 12% 10% 8% 6% 4% 2% 0% Adj. EBITDA Adj. EBITDA margin EBITDA EBITDA margin ROE (FF) ROCE (FF) ROIC (FF) EBITDA/margins set to expand on better activity although 2016E - Adj. EBITDA is adjusted for financial costs linked to construction debt - We see a 12% (9%)* EBITDA CAGR in E, i.e. margins at 15-17% Source(s): Selvaag, Fondsfinans research. *Note: Adjusted line... seems soft on our forecast. The returns trend looks even better - Except for 2016E returns are in a long term expansion trend - Higher margins, less capital tied-up - JM s c. 28% ROE isn t comparable* Source(s): Fondsfinans research. *Note: includes construction, Swedish land options 11

12 Finances on solid ground, we see room for additional DPS BALANCE SHEET IB debt overview/split (latest) (%) NIBD etc.*, balance ratios (NOKm, %) Top-up loan (2018 NOK 500m bond), incl. amortised amount 18 % Construction loan (specifically for adjusted net debt) 41 % 2,500 2,000 1, % 80% 60% 1,000 40% % 0 0% Land loan 41 % NIBD NIBD, adj. Equity ratio NIBD/Equity NIBD, adj./equity GIBD stable at NOK 2,761m... - Construction loan at NOK 1,146m partly offset by binding unit sales - NOK 500m unsecured NIBOR % maturing in while cash inflow lowers NIBD - NIBD, adj. adjusts for the 60% acceptance ratio/binding unit sales E debt ratio down towards 60% (40% adj.), gearing* towards 2.3x Source(s): Selvaag, Fondsfinans research Source(s): Selvaag, Fondsfinans research. *Note: NIBD, adj. used 12

13 Based on current starts/est d sales, we re below the market ESTIMATES SUMMARY AND CONSENSUS Fondsfinans vs. Bloomberg consensus* (NOK m, %) Estimates vs. 2015E 2016E FF vs. BB Consensus (Bloomberg)* FF Cons. FF Cons. 2015E 2016E Revenues 3,220 3,278 3,211 3, % -3.9 % Revenue growth 9.3 % 11.3 % -0.3 % 2.0 % -1.9 p.p p.p. EBITDA % -1.4 % EBITDA margin 13.2 % 13.9 % 12.7 % 12.4 % -0.6 p.p. 0.3 p.p. EBIT % -7.8 % EBIT margin (%) 12.4 % 13.1 % 11.7 % 12.2 % -0.7 p.p p.p. Pre-tax profit % -8.2 % Pre-tax margin 11.8 % 12.2 % 11.5 % 12.0 % -0.3 p.p p.p. Net profit % -8.3 % *Note: Very few participants and infrequently updated data Estimates vs. 3Q15E 3Q15E % Consensus (Bloomberg)* FF Cons. deviation Revenues % Revenue growth % % 0 p.p. EBITDA % EBITDA margin 10.6 % 12.3 % -1.7 p.p. EBIT % EBIT margi 10.1 % 11.4 % -1.2 p.p. Pre-tax profit % Pre-tax margin 7.2 % 11.1 % -3.9 p.p. Net Profit % EPS, rep % *Note: Very few participants and infrequently updated data Source(s): Selvaag, Bloomberg, Fondsfinans research. * Note: 2Q15E has very large spread 13

14 Inexpensive pricing, both on absolute and relative basis... PRICING (1) Selvaag historical P/B (x) Selvaag historical 1 yr. fwd. EV/EBIT Current year P/B Average 1 year fwd. EV/EBIT Average P/B highlights the y-t-d re-rating but is quite fair at 0.95x we argue - At P/B 1x shares should have a floor at NOK 29, i.e. a solid 15% upside On EV/EBIT Selvaag appears fair valued, while below that of peers - Note Selvaag s high margins vs. the sector*, 13.2% vs. 8.5% in E Source(s): Bloomberg, Fondsfinans research Source(s): Bloomberg, Fondsfinans research. *Note: construction names plus JM 14

15 ... and with yields above those peers as DPS grows y-o-y PRICING (2) Selvaag E EV/EBITs vs. peers (x) Selvaag E D/P vs. peers (%) % 6% 5% 4% 3% 2% 1% 0% EV/EBIT 2015E EV/EBIT 2016E DPS yield 2015E DPS yield 2016E Selvaag trades at a sector discount when excluding Sweden s JM - Note that JM has underperformed y-td on cost overruns etc. and has the highest yields vs. its peers at today s «low» pricing - We see limited CAPEX needs/solid FCF in E supporting DPS Source(s): Bloomberg, Fondsfinans research Source(s): Bloomberg, Fondsfinans research 15

16 Yield case in the making, but pay-out ratio close to its limits PRICING (2) Selvaag EPS, DPS etc.(nok, %) Selvaag DPS, FCFPS, yields (NOK, %) % 50% 40% 30% 20% 10% 0% % 14% 12% 10% 8% 6% 4% 2% 0% EPS, reported Pay-out ratio DPS Pay-out ratio target FCFPS DPS DPS yield FCF yield Selvaag increasingly becoming a yield play, but EPS is key to watch - DPS paid biannually, maximum 50% of EPS at current covenants E DPS CAGR 17% Strong FCF partly reflects finalised projects, partly better cash control - FCF likely to remain volatile but supporting today s DPS estimates - FCF-yield: 7-15%, DPS-yield: 3-6% Source(s): Selvaag, Fondsfinans research Source(s): Selvaag, Fondsfinans research 16

17 Attractive upside via both historical EV/EBIT multiples... VALUATION (1) Historical EV/EBIT multiples SOTP Fair value NOK 30 10x) SOTP (HISTORICAL MULTIPLES) 2016E EBIT 2017 EBIT Multiples NOKm Per share Property development , Other , NIBD, 2Q15 1, Minority interest 14 0 Equity value 6, Source(s): Selvaag, Bloomberg, Fondsfinans research 17

18 ... as well as discounted cash flows (and other metrics)... VALUATION (2) Discounted Cash Flows Fair value NOK 42 (beta 1, WACC 6.2%*, terminal growth 2%) DCF BASED VALUATION Assumptions All years Beta 1.0 WC/Sales % NPV CF Market risk premium 6.0 % Fade period grow th rate 3.0 % NPV CF Risk free rate 1.6 % Terminal period grow th rate 2.0 % NPV of TV 4,357 Tax 27.0 % Tax in % of EBIT % Estimated EV 5,656 Debt risk premium 5.0 % NIBD, 2Q15 1,610 Equity share 50 % No. of shares (fully diluted) 93.8 Equity value 4,046 Return on equity 7.6 % Equity value today 3,944 Return on debt (pre-tax) 6.6 % Weighted average cost of capital 6.2 % Equity value / share today (NOK) 42.1 Source(s): Selvaag, Bloomberg, Fondsfinans research. *Note: peers AF Gruppen and Veidekke has lower assumed risks premiums) 18

19 To conclude; a 44% upside to target, we initiate with BUY VALUATION SUMMARY DDM, HISTORICAL EBIT SOTP, PEER P/E-EV/EBIT MULTIPLES Blended valuation (NOK)/multiples (x) Implicit multiples* (x) 2015E 2016E 2017E EV/S EV/EBITDA EV/EBIT P/E *At blended price target Supportive valuation on all metrics - In addition to historical SOTP, DCF and P/B a DDM yields NOK 31, peer 2016E EV/EBIT and P/E yield NOK 33 and NOK 36 respectively Oversold following China sell-off - While Selvaag has outperformed y-t-d it is the weakest among the names (e.g. AF Gruppen, JM, Veidekke) q-o-q Implicit EV/EBIT particularly attractive in comparison - Peers at 11.6x, historical multiple at 10.9x; we value Selvaag at 15.5x (P/E12.7x and 6.9x vs. our 12.5x) Source(s): Selvaag, Bloomberg, Fondsfinans research 19

20 In sum: In Oslo we trust... and Selvaag is cheap! CASE/ESTIMATES - SUMMARY/OVERVIEW Key Figures (NOKm)* E 2016E 2017E 3Q14 3Q15E Revenues 2,812 2,197 2,945 3,220 3,211 3, EBITDA EBIT Pre-tax profit EPS, rep EPS, adj Op.CF / Share (Op.CF - Capex) / Share Revenue grow th 808 % -22 % 34 % 9 % 0 % 10 % 13 % -14 % EBITDA margin 18.2 % 13.2 % 13.1 % 13.2 % 12.7 % 15.3 % 12.5 % 10.6 % EBIT margin 17.4 % 12.2 % 12.4 % 12.4 % 11.7 % 14.2 % 11.8 % 10.1 % Pre tax margin 15.9 % 10.8 % 11.8 % 11.8 % 11.5 % 14.0 % 11.0 % 9.8 % DPS Dividend yield 0.0 % 0.0 % 2.6 % 4.1 % 6.2 % 5.9 % EV/EBIT P/E, adj P/B ROE 20 % 8 % 11 % 11 % 10 % 13 % ROCE 13 % 6 % 8 % 8 % 7 % 10 % NIBD/EBITDA* *Reported incl. IFRS/IFRIC-15 Adj. figures (NOKm)** E 2016E 2017E 3Q14 3Q15E Adj. EBITDA Adj. EBITDA margin 24.0 % 16.0 % 16.4 % 16.0 % 15.2 % 17.6 % 16.3 % 13.6 % NIBD/EBITDA, adj **Adjusted for construction loan costs/debt position Norway s leading house developer - Proven and profitable business model, focus on «growth» regions No major hurdles from Norwegian macro risks - Ready for growth, and likely improving returns in E We initiate with BUY, 44% upside to target - Cheap pricing/high yields even more attractive post sell-off 20

21 Accounts summary P&L, BALANCE SHEET, CASH FLOWS P&L* E 2016E 2017E 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E Revenues 2,812 2,197 2,945 3,220 3,211 3, , Revenue grow th (YoY) % % 34.1 % 9.3 % -0.3 % 10.3 % 25.6 % % % % 30.4 % 13.0 % % % 2.5 % % % 1.5 % EBITDA EBITDA margin (%) 18.2 % 13.2 % 13.1 % 13.2 % 12.7 % 15.3 % 15.2 % 13.4 % 0.4 % 3.7 % 12.4 % 12.5 % 16.2 % 13.1 % 14.9 % 10.6 % 13.7 % 12.0 % EBIT EBIT margin (%) 17.4 % 12.2 % 12.4 % 12.4 % 11.7 % 14.2 % 14.3 % 12.6 % -1.0 % 1.5 % 11.7 % 11.8 % 15.7 % 12.3 % 14.2 % 10.1 % 12.6 % 11.2 % Pre-tax profit Pre-tax margin (%) 15.9 % 10.8 % 11.8 % 11.8 % 11.5 % 14.0 % 13.2 % 11.7 % -1.8 % -1.0 % 11.2 % 11.0 % 15.7 % 11.2 % 13.3 % 9.8 % 12.4 % 10.9 % Net profit Net margin (%) 12.3 % 8.4 % 8.6 % 8.6 % 8.4 % 10.2 % 9.4 % 8.7 % 1.7 % -0.8 % 8.2 % 8.0 % 11.4 % 8.2 % 9.7 % 7.2 % 9.1 % 8.0 % Balance E 2016E 2017E 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E Cash and cash equivalents Other current assets 4,400 4,626 4,937 5,013 4,994 5,040 4,100 4,396 4,626 5,105 4,839 4,842 4,937 4,913 5,045 5,033 5,013 5,059 Property, plant & equipment Other non-current assets Total assets 5,735 5,970 6,214 6,370 6,494 6,745 5,582 5,703 5,970 6,449 6,366 6,317 6,214 6,328 6,277 6,349 6,370 6,513 Short-term interest bearing liabilities 1, , Long-term interest bearing debt 1,461 2,116 1,752 2,019 2,019 2,019 1,843 1,831 2,116 2,331 2,470 2,295 1,752 1,686 2,019 2,019 2,019 2,019 Other short-term liabilities Other long-term liabilities Total liabilites 3,588 3,711 3,757 3,755 3,732 3,790 3,370 3,442 3,711 4,192 4,089 3,979 3,757 3,809 3,790 3,781 3,755 3,809 Equity 2,147 2,259 2,457 2,615 2,762 2,955 2,212 2,262 2,259 2,257 2,277 2,338 2,457 2,519 2,487 2,568 2,615 2,704 Equity share (%) 0 % 0 % 0 % 0 % 0 % 0 % NIBD 2,943 2,009 2,334 2,196 2,080 1,932 1,817 2,034 2,198 2,631 2,312 2,246 2,146 2,098 2,297 2,214 2,175 2,078 Cash flow E 2016E 2017E 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E Cash earnings Operating cash flow Net CAPEX Free cash flow after investments Net debt repayments Equity issue / dividends Net cash flow *Incl. IFRS 21

22 We rate SBO as MEDIUM risk RISK ASSESSMENT External: - Economic risks: Selvaag s housing development business is highly dependent on macro variables such as consumer confidence, GDP growth, house prices, inflation, interest rates and unemployment, factors which may develop very differently between geographical areas and fluctuate substantially over time. The length of the project processes along with timing of projects may therefore impact earnings materially - Political risks: Norwegian taxation of housing and tax reliefs on debt are key items potentially impacting Selvaag. Important too are regional political decision making such as urban planning and regulation Internal: - Contract/project risk: Selvaag enters contracts and starts projects with limited P&L and balance sheet risk were possible but history shows that extraordinary events may severely impact margins. We argue Selvaag tries to lower balance sheet risk and start projects very selectively on basis of pre-sales activity 22

23 Share information KEY DATA - OWNERSHIP Share data Shareholders Share Data Sector: Constr. Bloomberg Tickers SBO:NO Risk Rating MEDIUM Outstanding Shares (m) 93.8 Market Cap (m) 2,372 Net Interest Bearing Debt (m) 2,214 Enterprise Value (m) 4,586 Free Float 43 % Average Volume ('000) 150 High / Low 52w 31.0 / 18.1 Weight OSEAX 0.14 % Rel. Perf 3 / 6 / 12-7 / -5 / 22 Abs. Perf. 3 / 6 / 12-8 / -6 / largest shareholders Name No. shares % Selvaag Gruppen As % Skandinaviska Enskilda Banken % Mp Pensjon Pk % Morgan Stanley % Pareto As % Evermore Global Value Fund % J.P. Morgan Chase Bank % Storebrand Norge I % Verdipapirfondet Delphi Norden % The Bank Of New York Mellon % Total 10 largest % Others % Total % Source(s): Selvaag, Bloomberg, Fondsfinans research Source(s) Selvaag, Bloomberg, Oslo Boers, Fondsfinans research 23

24 Definitions of ratings Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min -5%. Medium risk: min -10%. High risk: min -20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of : Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy % Buy 3 7 % Neutral 9 14 % Neutral 0 0 % Sell % Sell 0 0 % Total % Total 3 Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has been sent to the company for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. This is an initiation of coverage with a BUY recommendation. Ownership per in Selvaag Bolig: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): 0, corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries): 0, corresponding to 0 % of the company share capital Fondsfinans may hold shares in Selvaag Bolig as a result of daily trading or market making. Information on such holdings is not given when of non-significant value. Fondsfinans do not act as market maker in Selvaag Bolig. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. This report was issued and distributed Disclaimer Our research and general presentations, also available at our website are provided for information purposes only. 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