Australia’s housing boom continues apace, with data from CoreLogic in April showing that the housing market was growing in March at the fastest pace in 32 years, with the national home value index recording a 2.8% rise in March, for a 6.2% annual gain.
That growth lost pace in April, with housing values rising by 1.8% for the month – but that’s still enough to give a national annual rise of 7.8%, with the “combined regional” 12-month rise of 13% outpacing the “combined capitals” increase of 6.4%.
Although growth conditions have slowed, housing values are now 10.2% higher than the COVID low in September 2020, according to CoreLogic, with Sydney and Melbourne both having completely recovered from the downturn.
The low cash rate setting remains a major tailwind for upward pressure on housing market values, says the property research firm, with lending indicator data from the Australian Bureau of Statistics (ABS) showing the highest monthly increase in finance for investor property purchases since July 2003.
On the stock exchange, there are many ways to play the housing boom, from companies that build houses, companies that lend to people wanting to buy houses, companies that provide the building materials, companies whose platforms advertise houses for sale and rent, companies that handle the rental payments and companies that make things with which houses are furnished.
Here’s my view on how to play the home building boom:
1. Domain Holdings (DHG, $4.67)
Market capitalisation: $2.7 billion
One-year total return: 62.2%
Three-year total return: 14.5% a year
FY22 forecast yield: 1.3% fully franked (grossed-up, 1.9%)
Analysts’ consensus valuation: $4.95 (Thomson Reuters), $4.99 (FN Arena)
Domain Holdings Group Limited, which was spun out of Fairfax in November 2017, is the smaller player in the battle of the online property portals – its eponymous website www.domain.com.au is the clear number two to the much larger ($20.6 billion) www.realestate.com.au of REA Group Limited (REA), with the latter recording about 115 million site visits a month on average, more than three times as many as to Domain’s site.
But the bigger player looks a touch more fully-valued: at $156.05, REA looks expensive against analysts’ consensus valuations, with Thomson Reuters posting $159 and FN Arena’s collation arriving at an average of $152.40.
In contrast, Domain appears to offer a bit more scope for price rises from current levels, and a prospective yield that is slightly higher than REA’s 1.1% fully franked (grossed-up, 1.5%).
As expected, Domain’s real estate listings are cooking with gas – a trading update earlier this month said that total revenue increased by 8 per cent in the March quarter, and that it was experiencing “record property search volumes, open-home attendance, clearance rates and new account creation.” But taking the gloss off that was an admission that Domain expects total costs to increase in the mid-single digits this financial year, from $177.2 million last financial year.
2. Australian Finance Group (AFG, $2.76)
Market capitalisation: $741 million
One-year total return: 112.5%
Three-year total return: 32.6% a year
FY22 forecast yield: 4.6% fully franked (grossed-up, 6.6%)
Analysts’ consensus valuation: $2.98 (Thomson Reuters), $3.12 (FN Arena)
With home-loan demand surging, Australian Finance Group, Australia’s largest and most dominant brand in mortgage broking, is showing the results, with revenue rising 11% to $371 million in the first half of the financial year, underlying profit surging 41% to $24.9 million, and the net interest margin (NIM) lifting by 18 basis points to 179 basis points (1.79%). The residential home loan “book” grew by 5%, to $160 billion, while residential settlements were up 24% to $20.9 billion, as government stimulus supported increases in first-home buyers, as well as upgraders and refinance activity. The commonwealth government’s HomeBuilder scheme is not only driving new builds, it’s also pushing a rise in home renovations. AFG said in its most recent trading update that it was heading into the second half of FY21 with a strong balance sheet, no debt, a solid pipeline of lodgements and good cashflow. On top of the under-valuation that analysts see in the stock, AFG is also expected to deliver a more-than-handy yield.
3. GWA Group (GWA, $3.09)
Market capitalisation: $819 million
One-year total return: 25.5%
Three-year total return: –1.9% a year
FY22 forecast yield: 4.3% fully franked (grossed-up, 6.1%)
Analysts’ consensus valuation: $3.57 (Thomson Reuters), $3.44 (FN Arena)
As a provider of building fixtures, mainly for bathrooms and kitchens a – with well-known brands including Caroma, Methven, Dorf, and Clark – GWA is enjoying increasing demand, particularly from increasing residential renovation and replacement activity. In the December half-year, which was partially COVID-affected, GWA’s revenue was down 4.4% to $197.2 million, and normalised net profit was 17% lower at $20 million, but operating cashflow surged 18%, to $49.7 million. The company also lopped net debt from $144.8 million to $125 million in the first half. GWA says it maintains significant operational leverage to an improvement in the residential building cycle, while its commercial forward order bank is growing. GWA’s healthy yield outlook is a good bonus.
4. Nick Scali (NCK, $10.38)
Market capitalisation: $841 million
One-year total return: 140.5%
Three-year total return: 24.7% a year
FY22 forecast yield: 5.6% fully franked, grossed-up 8%
Analysts’ consensus valuation: $11.10 (Thomson Reuters), $11.57 (FN Arena)
The booming housing market is also driving sales at furniture retailer Nick Scali, where sales surged 50% in the March quarter, and by 242% in April, the first month of the final quarter. With the impact of store closes last year stripped out, sales lifted 37% in April from April 2019. The company doubled its half-year net profit as at December 2020, and NCK has provided FY21 net profit guidance at $78 million–$80 million (including JobKeeper subsidies of $3.6 million) which would represent growth of 85%–90%.
Nick Scali is benefiting from a perfect storm of factors: lockdowns in 2020 appeared to result in Australians re-evaluate the internal environments of their houses, and greater willingness to make changes to furniture; as well as the booming home-buying and renovation/refurbishment markets.
The same kind of theme is benefiting companies such as homewares retailer Adairs:
5. Adairs (ADH, $4.33)
Market capitalisation: $732 million
One-year total return: 203.6%
Three-year total return: 35.3% a year
FY22 forecast yield: 5.7% fully franked (grossed-up 8.2%)
Analysts’ consensus valuation: $4.70 (Thomson Reuters), $4.47 (FN Arena)
As well as lighting retailer Beacon:
6. Beacon Lighting (BLX, $1.81)
Market capitalisation: $404 million
One-year total return: 166.4%
Three-year total return: 12.3% a year
FY22 forecast yield: 3.5% fully franked, grossed-up 5%
Analysts’ consensus valuation: $1.905 (Thomson Reuters), $1.98 (FN Arena)
And you could also add online retailer Temple & Webster to that list:
7. Temple & Webster (TPW, $10.52)
Market capitalisation: $1.3 billion
One-year total return: 176.9%
Three-year total return: 140.3% a year
FY22 forecast yield: no dividend expected
Analysts’ consensus valuation: $11.80 (Thomson Reuters), $12.81 (FN Arena)
There looks to be attractive near-term value in each of this trio: the major risk here is that consumers start to re-direct spending from improving their homes toward such things as outdoor recreation, hospitality, and domestic travel – and eventually (hopefully!) international travel.
8. Rent.com.au (RNT, 19.5 cents)
Market capitalisation: $78 million
One-year total return: 413.2%
Three-year total return: 34.2% a year
FY22 forecast yield: no dividend expected
Analysts’ consensus valuation: n/a
Lastly, a really interesting stock in the residential property area is Rent.com.au (RNT), which operates a website dedicated to serving the 32% of Australians who rent. The website provides a single marketplace, comprising property agents and non-agent landlords’ listings, and a broad range of services needed by all the rental market participants. As a one-stop shop for renters and landlords, the Rent.com.au app is the #1 rated real-estate sector app in the Apple and Google stores, enabling renters to create tenant profile, view and apply for property listings, and contact landlords. The company says it serves a market of more than 7 million renters in Australia: the website has 3.9 million unique visitors. More than one million renters have now created a Renter Resume through its site.
For a monthly subscription and activation fee, users can also lodge extra cash as a rental payment “buffer,” synchronise payments with their pay cycles and add-on a credit reporting feature. RNT also offers a product called RentBond, which helps tenants pay their bond: if renters just need a short-term loan to cover their rental deposit while they wait for their bond refund, RentBond lets them borrow the funds for up to 21 days at no cost. This product has attracted competition from buy-now-pay-later offerings.
Other products include RentCheck, a tenant report which landlords and property managers use to verify identity and view any reported breaches in rental history (individuals can order a RentCheck to check their record before applying for a rental property); and RentConnect, billed as a fast, easy and free utility connection service that helps renters both disconnect and establish AGL utility connections at their new rental, at the same time, and get the best available deals on the new connection.
Earlier this month, the company launched its rental payments platform RentPay, an app to help tenants to pay their rent wherever they are, track the history of past payments, communicate with landlords and real estate agents, and set up reminders for future payments. RentPay provides the company with an addressable market of more than 2.5 million households. The company says it sees RentPay as “becoming the logical way people manage everything related to their tenancy, period.” At the same time, the platform is “double-sided,” in that it delivers benefits to both the renters and agents.
In just three weeks over January/February 2021 the RNT share price rocketed from 4 cents to 32 cents, on the announcement of a share placement to well-known Australian technology entrepreneur Bevan Slattery, who invested $2 million of a $2.75 million capital raising conducted at 5 cents a share. Slattery described Rent.com.au as a “disruptive platform with great potential, and the ability to scale” – which was music to the ears of investors who have followed his progress in companies such as Pipe Networks (which was acquired in 2010), NEXT DC (ASX: NXT), Megaport (ASX: MP1), Superloop (ASX: SLC), HR tech company intelliHR (ASX: IHR) and geospatial cloud-based data-as-a-service company Pointerra (3DP).
In the meantime, RNT is yet to record a financial-year profit, but it is making good progress on that front, with the March 2021 quarter the third straight profitable earnings quarter in EBITDA (earnings before interest, tax, depreciation and amortisation) terms.
RentPay is a potentially huge disruptor for the total rental market – there is a very big opportunity available for RNT, but it must be considered a speculative stock. However, there are valuations in the marketplace of 35 cents a share for RNT.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
