I want to do a few things today, so I'll not consider all that you wrote, and respond in detail. I'll opine on Motive only, plus I'll add thoughts of a philosophical nature that I wrote earlier – they touch on the underlying significance of what gets "settled", and what does not.
Motive Project
As of 23 February 2016, 62 units of Motive's 143 units were under contract. As at 30 June 2016, 65 units were under contract. How many will be added to being under contract by completion, I cannot be sure, but assuming completion happens in late December, say 70 units would be under contract. I understand that the tempo of sales increases after completion, because buyers can inspect the units, and move in. Maybe another 20 units will be sold and settled in the 6 months ending 30 June 2017. That would be 90 units settled out of 143, or 63%, leaving 37% not settled. Something like 3% of under-contract sales fall through, but picking a number like 90 units settled assumes the defaults get picked up by that 90-unit-settlement assumption. Obviously, one could pick any number in one's guesstimates.
I have no idea what settlements to expect from Motive, or from all the other completed projects. Using 25% to guesstimate what does not get sold of the total simply gives a better number than I started with, and maybe a higher percentage makes more sense. However, to value FRI purely on the settlements that occur in FY17 is too simplistic, so focusing too precisely on what might be the settlements value is sophistry – units not settled have a value that should be recognised in valuing FRI's stock.
On contract defaults, a detailed FRI valuation written by Wilson HTM circa July 2013 stated, “Finbar’s experience is that approximately 3% of pre-sales will default (peaking at 6% in the GFC); this may increase in weak markets.” Elsewhere in the report it states, “Settlement rates average 97% on pre-sales (with failed settlements re-sold within six months for at least the list price as a general rule).”
Waxing Philosophical
Using a guesstimate of FY17's EPS to derive a value for FRI goes against the way I have always valued FRI, because there is a huge measure of artificiality in FRI's annual NPAT, or EPS, and as projects get bigger, the artificiality increases. If for example, a $300m project completes on 30 June of a year, no revenue and profit would be recognised that year, whereas from an underlying-health-of-company perspective, the profits hidden in the presales contracts would be huge, and there is value in the stock not presold.
If three brothers owned and operated a FRI-style business – one brother being responsible for acquiring prime land, setting up JVs, gaining building approvals, and lining up banking finance; another brother being responsible for building optimal value blocks of units on time and within budget; and the third brother is responsible for presales and settlements, then to what brother would we attach the accolades and rewards of the business success? Each brother adds value for each step along the way to final settlement. Similarly for FRI, each day of its activities contributes value, not just the settlements of each day.
In the past I used to look at the constantly rising DPS to get a feel for the value of FRI, on the basis that Management would know when to expect the settlements' cash to come in, so the DPS could be made to give a smoother trajectory than the EPS trajectory. Moving to larger, and hence longer-term, projects has complicated the funding of dividends, so the smoothing factor is not as reliable as it was in the past. Anyhow, there is a difference between a share valuation, and a target SP, and using FY17 as a proxy for the FRI's future may give a reasonable approximation for the latter.
FRI Price at posting:
85.5¢ Sentiment: Hold Disclosure: Held
(20min delay)
