Peet Limited (PPC) Earnings Call Transcript & Summary

Thank you, and welcome to everyone for our first half results presentation. Also with me today is Brett Fullarton, the group's CFO. I'd like to just start with just a high-level summary of what we're seeing and just setting the tone for what I'll step through shortly with the presentation itself. I think fundamentally, what we are seeing is that the markets that we are in across the country are certainly at different points in their various recovery cycles. And I'll talk about those separately as we move forward and some of the challenges in some markets, but obviously both positive and certainly some mixed. But the group, we've entered into first half '24 with a lower level of contracts on hand compared to this time last year. Having said that, I think when you look at our result, given those contracts on hand as we moved into this current financial year, it is a very solid and sound result despite some of the mixed conditions that we're seeing. I think quite importantly, and as you'll see, is the group has clearly demonstrated the ability to respond to improving markets. That's highlighted by the scale and breadth of our pipeline where we've been very clear or very deliberate in increasing our level of sales, which is quite significant in the first half. And I think that's a big plus in terms of the land bank that we have pulled together over many years and will continue to serve us extremely well as we move into the future. The fundamentals of our space certainly do remain sound, but they do have some challenges. But constraints on new supply are becoming increasingly evident. We're seeing that across the country. So we're well averse with that. But what it reinforces to us is that the group's pipeline is well positioned to take advantage of that and deliver product given that we have all necessary approvals in place. And I think when you look at our sales performance in the first half, clearly demonstrates that we do have the ability to put the foot on the accelerator, so to speak, to bring on new production. So just with that, moving into the presentation in terms of Slide 3, the company overview. We are a very old country -- company, just over 128 years. We have a very strong pipeline of just over 35,000 lots, which is quite clear. It is underpinned by a very -- a number of low-cost, large-scale projects in key growth corridors. And so when I look forward in terms of markets and our ability to respond to improving activity and consumer demand and product mix, our projects can respond quite quickly with a whole range of product and at different price points with a very low cost base. We are a very national business. We have extensive capabilities. We continue to demonstrate our funds management business. We have that capability. We certainly continue to have discussions with capital partners around acquisitions as well as quite importantly, unlocking the value of our land bank, particularly around Flagstone and the University of Canberra. As I move on to the next slide, it is a very strong platform for growth. And when I mean growth, we do look at the medium to long term and our ability to manage these projects and deliver value. It's got an end value of just over $13 billion of some 44 projects. And as you can see, we're very well located across the key states, including the most popular states. And most of those large projects on the Eastern Seaboard have very strong embedded margins, and I'll talk about that shortly. The average age of our land bank now sits at 13 years. So that's demonstrated with our margins that, particularly across the Flagstone, UC, Googong and so forth. In terms of our commitment to sustainability, we have a very large focus on innovation, particularly when it comes to water management, which is coming more and more critical as many parts of the country. Water is key and our innovation around Brabam, Googong and so forth plays a major role in that as does the energy consumption savings, trying to deliver cost of living savings to our customers, either through solar panels, batteries, et cetera, and making sure that we adhere to the environment. And what we do know through the environmental tree scaping and so forth, it does make it a very attractive place for people and families who want to live in our states. The other part of our business that we're very much focused on in terms of the social is mental health. That is a very passionate part of our business, both what we do internally from the Peet team across the country in terms of capital -- from raising money for programs, particularly with the Black Dog Institute, bringing together the Perth Scorches and mental health ambassadors. But we've also extended that into leadership pathways as we've got there through Aboriginal Youth and young women in WA Cricket through the WA Cricket Foundation. All that comes together in a nice neat package nationally, and that's certainly a core part of our focus over the coming years to continue to explore and expand and make a difference on the ground to young people. As we move into the results for the half, we recorded $15.5 million net profit after tax. That was down some 56% on the first half. The principal gap was the New Beith settlement in the first half of '23 of that sale of the landholding, which was some $80 million a couple of years ago. But if you strip that out, I would say that our underlying profit for the half would pretty much be like-for-like. So all in all, not a bad outcome, certainly given that we -- the runway into the first half with the contracts on hand was pretty much half of what it was this time last year. Our earnings per share was sitting at just under $0.033. Our EBITDA margin was 18%. That was impacted by 2 things. One was the New Beith sale, but also it was impacted by our ACT and Vic projects in terms of their settlements -- sales and settlements thereof in the first half, which are very high margin. So the key thing there is that the ability -- the margins can respond very strongly in the upside when those markets will start to show signs of recovery, and it won't take much. Our NTA sits at $1.28. That's at book, doesn't reflect the market value of those assets, and I'll talk a bit about that shortly. Our gearing, our balance sheet gearing sits at 35.2%. That is up. That is still below where we guided the market based on the acquisition of both the Flagstone City project and the University of Canberra project. The University of Canberra project settled in November last calendar year. That is still below where we guided. And as I'll talk through shortly that if you strip out the land vendor payments and just look at the bank debt, we sit just below 30% moving forward. In terms of what we've done. Sales, just over 1,100 sales, that's up 82%. That is a strong response from our pipeline. Again, I think it demonstrates our ability to respond very quickly to any improving demand. We settled just over 1,100 lots. Our contracts on hand at the end of December sits at just under $445 million. That's broadly in line with FY '23. To put in context, this time last year, it was closer to $900 million. So we had a very strong settlement delivery program in FY '23. So to deliver what we have given those contracts on hand, still a solid result. And as at the end of -- or as February, as we move into this mid-February, our contracts on hand are broadly in line with what we have in December. We also commenced 2 new projects in terms of presales. That is one in South Australia, which is a built form project and another in Victoria. In terms of delivering against our strategy, we continue to deliver on these objectives. As each month, each year passes, we continue to see significant value in our land bank continue to increase. And that is fundamentally because of the approvals that we have in place, including environmental. It includes that they're becoming more well-established projects. So they're just not first-time buyer projects. They're a combination of all first-time buyers, upgraders, downsizes and investors. We're getting price growth. We're well located in the key growth corridors. Land is scarce. Infrastructure is taking time to deliver with new projects. So we are very, very well positioned. And therefore, when I look at what has transacted in the market over the recent 12 months to 2 years, it clearly demonstrates that the market value of our pipeline is materially higher than what our book value is. If I look at the first box in terms of vesting, a couple of key points I'd like to note is that the Flagstone project, we are seeing the market value of that increased quite strongly based on recent Googong comparative sales. The cost per lot at the end of December, all in is $18,000 a lot. So it's a very low-cost, high-margin, large-scale project. We are seeing increasing productions due to strong demand. So we're averaging in excess of 20 sales a month. We're still getting price growth. In fact, we're probably seeing more demand now, certainly since the end of November as we move forward. and the Town Center, which is a large 100-hectare parcel of land that will deliver a number of precincts from health, retail, bulky goods, et cetera, et cetera. We continue to have discussions progressively with both government and in the private sector around the health precinct. And as well as we continue to engage with a number of capital partners, both onshore and offshore as well as businesses looking for opportunities to unlock the value alongside us, either in joint ventures, partnerships, syndicates, funds as we move forward. The key to that Town Center for us will be unlocking the health precinct first and foremost, and that really -- that will set the value proposition as we move forward in relation to the broader town center. But at the moment, what we are seeing is a strong uplift in sales across the Queensland portfolio, particularly Flagstone. We are seeing price growth. And hence, we're also now looking to bring on additional stages commencing in the second half for delivery into FY '25. In relation to the University of Canberra project, another large-scale project, we settled on that in November. It's been a long time coming. We now own that. And to put that in context at the 31 December, our cost base per dwelling sits at $32,000 per dwelling, again, demonstrating our ability to negotiate and acquire large-scale, high-quality projects with a very low cost base that will serve us with high margins as we move forward into the medium to long term. We are progressing the development approval with the state -- the ACT Territory government to enable us to effectively look to be in market, hopefully, by the end of calendar year '24, if not, probably early calendar year '25, which we think probably could be close to timing of the uplift in the ACT market. And we continue to explore value-add opportunities, particularly around both Flagstone, as I pointed to earlier, with capital partners. but also with the University of Canberra, particularly around build-to-rent. So there are a number of value-add things that we will continue to explore. But I will point out that we'll make sure that we maximize the value for Peet shareholders before we enter into any JV. As I look to expand, we do have a busy pipeline in the next couple of years. We expect settlements to come from 8 new projects by FY '26, and that will activate our land bank to some 88%. So that will be the highest on since I've been with the company and probably where I see it operating between 88% and 90%. And that gives us a significant amount of flexibility in terms of our production capacity to maximize various markets and the timing of their cycles. In terms of our strong capital management. We remain disciplined, but we were aligning production levels with demand. And for those of you on the call who heard me this time last year, we were very cautious around where the depth of the market was. Therefore, we pulled back our stage production to make sure that we match production with underlying demand. What we are seeing now is the opposite in particularly the WA, SA and Queensland markets. And therefore, we are now actively increasing our levels of production across key projects in those markets to take advantage of the current uptick in those property cycles. And all that gives us strong visibility of future earnings underpinned by that pipeline, which is low cost. We'll continue to leverage our established funds management capability, particularly around Flagstone and University of Canberra. And we'll also look to remain in the market with our buyback where it makes sense to do so, and we'll trade off and assess the value proposition versus buying our stock versus new acquisitions. And that's just another part of our capital management armory as we move forward into the future. Just quickly, high-level results overview. I've pretty much covered a lot of it, but an 82% uplift in sales, driven by particularly WA Queensland and South Australia. Lot settlements were 11% higher, and you'll see those increase in settlements come through in the second half, again, driven by particularly WAN SA. Our revenue was lower when you compare to the previous period, again, mainly due to the new beef property settlement, but that has been quite partially offset by an increase in settlement revenue from other development projects as well as an increase in funds management fee income based on the uplift in sales and again, across the WA market for us. The margin was lower, as explained earlier, through when you compare it with the New Beith sale, but also the ACT and Vic markets, where the sales and sets were lower due to their property cycle. And those markets contain our projects, which have significant embedded margins in there. So when those markets start to recover, our ability to recover with it will be pretty much immediate. In terms of cash flow, again, New Beith plays a role in the comparative in terms of revenue. Our payments for development and infrastructure is up, and that is just a function of us now turning our attention to putting more money in the ground to bring on new stages to meet an uplift in sales activity as well as inquiry demand. Our borrowing costs were pretty much in line. Our tax paid was up, and that's consistent with last year's full year earnings performance. And as I said earlier, the first installment for the acquisition of University of Canberra was made during the half at $21.2 million. That includes a GST payment of $6 million, which we have now had refunded in January in the second half of this financial year. Other than that, we didn't do any new land acquisitions for the half, and it's probably unlikely that, that will -- there'll be no new acquisitions in the second half at this point in time. We're very much focused on putting in more production and dealing with what we have. In terms of the balance sheet, our total assets sit at just over $1.1 billion. That obviously does not reflect the market value of our development projects or co-investment stakes in JVs or funds. And as I alluded to, when you look at the comparative cost per lot or cost per dwelling across Flagstone and UC, I don't think it's too hard to get a feel that the market value of our assets is substantially more than what is in our book. Our book NTA sits at $1.28 like-for-like with this time last year. Cash relatively consistent. Our debt is up. That is a function of the University of Canberra as well as increased development spend moving forward. Interest cover sits at 3. That is a function of our EBIT in the first half. Other than that, pretty much everything is relatively consistent. What I would say with our gearing is that our stated long-term range is 20% to 30%. And when you look at the acquisition of Canberra, if you strip the land bundle payments out remaining and just look at effectively interest-bearing bank debt and bonds, our gearing sits -- our balance sheet gearing sits at 29%. Obviously, our bank gearing, which is adjusted of mortgage valuations by bank, that sits lower than that as well. So plenty of headroom under our covenants. So to move forward on to Slide 13, our shareholder returns. Again, we've returned just under $200 million to shareholders since 2018. This remains a core focus of ours in terms of getting that blend right between dividends, which are fully franked and our capital buyback. We've bought back circa 4% of our 5% buyback. The average buyback price is $1.05 versus an NTA of $1.28 and versus a market NTA, which we believe is quite substantially higher than our book. And that buyback is extended to August '24. If I quickly turn to the operating performance. As you can see there on Slide 15, our EBITDA was down 47%. Again, New Beith plays a predominant role in that. Our joint venture earnings were lower through fewer equity accounted profits, and that's predominantly from the ACT projects, in particular, Googong. Our funds management contribution increased through sales and sets. And as always, we continue to make sure that we can run the most efficient and effective business through operating efficiencies and overheads. And if I look at the group sales and settlement activity, as I said, we've touched on this before, but certainly the WA and SA markets. The WA market has had a very strong rebound in volumes. We started to see that as we -- in the second half of last financial year. But the WA market has taken another leg up in terms of volumes in the first half, but we're finally seeing some pretty strong price growth across our WA projects, particularly in the Northern Northwest and Northeast corridor, where we've seen some price growth, probably averaging a number of projects around the 25% mark. So a long time coming. It's finally here. We do believe it's sustainable in the short to medium term. The net overseas migration in WA is strong. The population is strong. So WA will continue to deliver improved funds management fee income. The SA market pretty much has remained steady with a slight tick up in sales, but price growth relatively moderate, but again, off a very high base. But quite importantly, now, we're really starting to see Queensland start to pick up in volume and price growth as well. And indications are that, that market driven by net interstate migration will be quite robust for the foreseeable future. The biggest challenge that we have is the Victorian ACT markets. They are yet to respond in the upside with their market cycle. They are working through various mechanics, if you like, in this property cycle. Victoria is probably driven by consumer confidence. It is receiving population growth and wage growth, but consumer confidence is pretty low. And that is also driven by the builders. The number of builders that have gone into liquidation or administration over the last probably 18 months has been quite significant and more than any other state in the country, and that is impacting confidence. And what we're seeing is that it's very difficult. The market doesn't really want title lots. They much prefer to try and buy lots that are probably 18 months to 2 years ahead of title. We pretty much cap our title selling ahead of titles probably between 9 and 12 months for 2 reasons, capital management reasons, but also just in terms of making sure that people can settle and it's not like a free option. So -- and the ACT market is quite different. I think the ACT market has had a significant brought forward of demand. It's working through that. It's probably taking its medicine hard and fast, which is a good thing. We believe it's close to at the bottom. The question then becomes when does that market start to respond. When it does respond, it will be quite material to the peak bottom line, particularly in relation to our projects in the ACT market, which are large scale and have a very, very low cost base. So when I look at on balance, WSA Queensland are going to be continued key drivers in the second half. The ACT and the Vic markets are mixed, and that will be something that we'll keep a close eye on. But they will return. The fundamentals remain strong. Population growth continues, wage growth continues, but they're just working through their various cycle structures. In terms of settlements, the settlement activity is in line with our expectations. But quite importantly, our construction time frames continue to normalize. So we're seeing that across the country now that the time frames are pretty much halved for us. Mind you, this time last year, they're quite extended. And the positive there is, like I said earlier, with Flagstone, we can bring on new production, knowing that we can bring that production in, in half the time what it would otherwise have been, say, this time last year. As I touch on enquiry levels on 17, a good leading indicator for us. They continue to improve. They're generally in line with the second half, but materially higher in the first half '23. What we are seeing is the second quarter, the December quarter, they were up by more than 10% compared to the September quarter previous. What we are heartened by the first home buyer activity has increased for us by 17% since June '23, principally WA, Queensland and SA but there is a general cautiousness around the country, even in WA, SA and Queensland around cost of living pressures. And that -- we're playing a role in trying to minimize that and getting the right product at the right price point to able to deliver, and that seems to be working. But you can see there on that graph, Queensland has definitely had a strong uptick as has WA. Vic is pretty well steady. And we're seeing that SA has also ticked up. The weakness in those inquiry levels is the ACT, but that's also a function of us not bringing on any new stock or stage releases just given where the demand is and us working through and getting the lots under contract that we do have in that market to settle. Quite heartening, too, is as I look at the inquiry levels into the March quarter '24 to date, this current quarter, we've seen quite a strong increase, another increase in inquiry levels. So again, I think that bodes well around sentiment as we move forward. And I think it is reflective of where we are with the housing challenges across the country, which aren't going away anytime soon. If I touch on just the outlook on -- commencing on Slide 19. Again, part of our large portfolio, we have up to 8 new projects commencing over the next 3 years. They're pretty much detailed there, 2 community projects, a lot of built form, particularly led by the University of Canberra. What I would point out in relation to the built form in particular, around the federal government's housing affordability fund. Built form is taking a big focus on housing, and we are in discussions, advanced discussions, with many community housing providers across the country looking to tap into the federal government funding to deliver affordable and social housing. And this part continues to -- a part of our business. We'll continue to explore those opportunities, which we think will add value as we move forward into certainly FY '25 and beyond. But we're well positioned to capture a reasonable share of that federal government funding in relation to the housing solution. If I just quickly touch on our focus for next year or FY -- this current financial year as we move into '25. We'll always consider selective acquisitions, but I think we price risk well. But I don't see any acquisitions occurring in the second half. We're very much focused on cash flow, operating cash flow as well as increasing our levels of production. We'll continue to accelerate our production out of our land bank and unlock those embedded margins. And likewise, with the Victorian ACT markets, whilst those market conditions remain at the bottom of their cycles, we are very well positioned to capture any uplift in market in relation to new stage releases. So our ability to respond overnight is strong. As I said, we'll continue to focus on our townhouse pipeline, and we'll leverage that government funding through community housing providers across the country. And in the short term, again, we'll continue to match our production levels with those qualified buyers, and that's a combination of increased production. Those states are doing well versus matching production with those states that are struggling. In terms of the outlook. Just recapping, the various state and territory markets are at different points of their respective property cycles. And clearly, WA, SA, Queensland are strong. And we have mixed challenges across the ACT and Vic markets. Again, I'd like to reinforce, there's nothing structurally concerning about those markets. They are just working through a normal cycle coming off a very high base. If you look at the last couple of years, those 2 states had very strong sales and price growth. And this is just a correction or an adjustment as they all have done, as has WA and Queensland done. It's just that those 2 markets have had a very strong run. The cost of living pressure and consumer confidence continue to drive a cautious sentiment across. Interest rates are either at near or peak of the current rate cycle, but that is keeping a close eye on that where the RBA sits. Obviously, inflation is trending down. Again, we are seeing -- across the country, we are seeing prices pull back, particularly in civils and earth pricing. And just recently, in terms of Queensland, we've probably seen around another 8% drop in our Civil and Earth tender pricing. We're starting with the release of Aston in Victoria. We've seen quite a drop in tender pricing as well. Again, not surprising given that those markets have come off a very high base and then it's probably normalized. So that's encouraging. We're seeing supply chains start to normalize as well, particularly around our built form. Probably the biggest challenge with our built form projects has been labor. I don't see that rectifying anytime soon. But on the other side, it continues to drive underlying structural demand for our projects. The residential drivers remain supportive, as I got there, but I can't emphasize the constraints in housing supply. The amount of red tape and green tape is definitely increasing, in our view, is getting more challenging. But the point I'd like to make here is that we and our land bank are pretty much through all that and our ability to increase market share as market activity improves will be at the front of the queue. So that's all the hard work we've done over the last couple of years will pay off over the short to medium term at least. Certainly, overseas migration continues to be elevated and labor market conditions continue to be quite strong. Encouraging enquiry levels continue to improve. And as I said, we'll continue to be very, very focused on executing our strategic objectives. I think we've executed extremely well over the last number of years, particularly when you look at the flag and the UC transactions as well as other acquisitions we've been able to do, and that flows into our disciplined approach to capital management. So as we move into the second half, we're buoyed by contracts on hand. We're buoyed by sales activity across key markets, keeping a very close eye on the ACT, Victoria markets. Sales inquiries are definitely improving, and we've seen another step change as we move into this March quarter in terms of sales inquiries. So that's encouraging. So with that, that probably concludes my summary of the first half, and I'm more than happy to open up for any questions that people may have.

[Operator Instructions] There are no questions at this time. I'll now hand the conference back to Mr. Gore.

Thank you. If there's no questions, it's probably not a bad thing. But Look, I'd just like to reassure that the business is in great shape. As I said earlier, there's mixed market cycles, nothing new to us. We're very well planned in relation to ensuring that we can continue to expedite our production levels, which flows into earnings whilst at the same time, managing our capital position. We remain disciplined around any acquisition opportunities that we see. And as I said, we're very much focused on unlocking the vast amount of value that we have in our land bank that, in our view, continues to grow year by year. That is definitely demonstrated by comparative sales evidence across the country, which reinforces our belief in what our pipeline can deliver over the medium to long term. It is a long-term business, but when you have about 88% to 90% of your pipeline activated, the levers that we're able to pull to deliver growth into the future makes it a lot easier in terms of taking our business forward as we continue to look to grow. So with that, I'd like to thank you all very much, and look forward to talking through our full year numbers later this calendar year. Thank you.