SaberX I was in a hurry when I considered what “settlements'...

SaberX

I was in a hurry when I considered what “settlements' percentage to use, so I simply selected Arbor North, because that project was completed in the middle of a financial year, and because the project was neither significantly larger nor smaller than the the Motive Project.

As a rule, according to the now-dated Wilson HTM report that I mentioned previously, FRI tends to proceed with projects when they have 55% of the final sales value under contract. Management probably has a feel for the percentage of presales usually reached on practical completion, but I do not.

The Wilson HTM report also states, “The majority of settlements will occur in the period that practical completion is achieved. We assume 15% fall into the following period. In reality this spillover may be higher or lower depending on the level of pre-sales prior to practical completion.” This assumption is crude, in that there would be a significant difference of the settlement split, depending on the number of weeks between “practical completion” and EOY, but if it were basically true, then 15% falling into the following year would be OK for projects that reached practical completion before mid-year. The “if” is a big if, so 25% not settling in the Motive Project, seems to be a better metric than 15%, but that does not recognise that there may be reasons peculiar to Motive, or peculiar to the Perth market for units in FY2017, for using another percentage, say 30%, or whatever.

On the topic of selecting percentages, I used 25% of settlements to guesstimate PBT. However, if the market has softened, and FRI decides to price units to meet a sales-volume-based criterion, maybe 20% is a safer presumption. Consequently, starting with $200m, one could end up with a FY17 NPAT guesstimate of $200m x 70% x 20% x 70% = $19.6m, which divided by 232m shares renders a guesstimated FY17 EPS of 8.45c, and a PER of 10 would give an SP of 84.5c. Now if in a a more optimistic frame of mind, we calculated an EPS of $200m x 75% x 25% x 70% ÷ $232m = 11.3c, a PER of 10 would suggest an SP of $1.13c. One could invent many other numbers, including fiddling with the PER.

At some time, investors are going to wonder what FRI will do in F18 and beyond. Importantly, FRI ended FY16 with presales of $451m, and a pipeline of $1.84b. I do not know how to extrapolate these into reasonable settlement estimates, but dividing the pipeline by 6 suggests that $300m a year should not be out of the question. This, and the dividend yield, may ensure that the PER does not decline below 10.

Another way to put a subjective value on FRI is to ask yourself what sure-knowledge fixed dividend for many years would leave you indifferent to the alternative of accepting whatever DPS may be declared, then discount that fixed dividend to a NPV, which is equal to the fixed-value DPS (D) that you select, divided by your rate of interest, (I). A “D” of 10c , and an “I” of 8%, gives D/I = $.10/.08 = $1.25.

Suffice to say, I think buying in at 85c or less, has more upside exposure than downside, and the yield is generous enough to allow an investor to wait a long time to get the hoped-for capital appreciation. This is not an investment style that suits all investors.