Gateway Lifestyle Group (ASX:GTY) has seen its shares tumble on the back of a downgrade. Does the cheaper share price mean that value is now starting to emerge?
GTY is the largest internally-managed owner and operator of Manufactured Home Estates (MHEs) in Australia. The Company is focused on the conversion of mixed-use residential parks to MHEs and has grown its portfolio to 56 residential land lease communities located on the east coast of Australia.
The volume in the number of developments settled each year is the key driver of earnings growth for the Company. As recent as February of this year, GTY provided guidance of ~250 settlements for the 12 months to 30 June 2018 (FY18). However, this week the Company issued a trading update in which it commented that it now expects new home settlements to be in a range of 230 to 240, compared to the previous guidance of ~250.
Why did Gateway Lifestyle issue a downgrade?
The reason for this downgrade is that there has been an extension of the period from sale to settlement. This is due to incoming residents taking longer to sell their family home as a result of moderating conditions in residential housing markets.
Whilst enquiry levels remain robust, GTY now expects new home settlements to be in a range of 230 to 240. This is compared to the previous guidance of ~250 settlements for the 12 months to 30 June 2018 (FY18). As a result of reduced settlement volume, the Company expects earnings growth of 2-4% for FY18. This is compared to previous guidance of 7%. The latter predicated on the Company achieving (or bettering) the targeted number of settlements.
What does it mean?
In context, the latest downgrade is not isolated and previous downgrades have been due to the Company’s inability to match its guidance on the number of settlements. As referred to above, earnings growth expectations for the Company are strongly linked to the number of settlements achieved in a year. Whilst settlements not completed eventually contribute to earnings the following year, the risk of not achieving settlement targets is an ongoing risk. In particular, aside from slowing settlements timeframes, weather is also a risk in regards to GTY achieving its settlement targets. To this end, it is worth noting that ~20 sites didn’t complete in FY17 due to weather.
Is the share price now attractive?
At present, market sentiment towards GTY is likely to remain negative. This is because the downgrade to earnings from lower-than-expected settlement volumes is likely to overshadow:
i) The progress being made in improving the overall quality of GTY’s assets by selling lower-quality assets in order to reduce gearing levels, and
ii) Other positive metrics such as continuing strong development margins. This is with a positive trend in achieved margins through 2H18 and asset yields (supported by rising rents) remaining well above GTY’s cost of debt.
While the shares are now trading on an undemanding 1-year forward P/E multiple of around 12x, it may not necessarily represent value just yet.
The chart for Gateway Lifestyle
GTY had some strong support near $1.90 which it seemed to be respecting for the last year. This week’s downgrade has seen it fall through that support level. There is a risk that the $1.90 area now becomes a level of resistance. For the chart to go back to a neutral state, we need to see GTY quickly get back above that $1.90 level. That would make us feel confident that it can at least track sideways for a while. If it can’t do that, then we might see GTY shares drift lower.
Michael Gable is managing director of Fairmont Equities.
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