For what it is worth here is my summary of RNC’s FY13 reporting.
There is little doubt of the positive trend across most metrics.
EBITDA FY11 $4.0m FY12 $4.8m FY13 $5.5m
Operating CF FY11 $0.8m FY12 $3.1m FY13 $3.5m
Net debt/EBITDA now sits at a respectable 2.0x.
I see the following negatives with the result:
Declining Revenue FY11 $28.4m FY12 $28.4m FY13 $27.7m $325k of the decrease is explained by the loss of Elders to AgentPlus, but the $400k decrease in Prop Mgmt revenue is surprising. Mgmt claim their new initiatives should lead to an improvement in FY14. Something certainly needs to be done here to leverage off the brand and footprint.
Mgmt highlight the $1.4m decrease in operating costs in FY13, which is great to see. Employee costs are the largest business expense. Compared to revenue these costs remained constant at 57.2% from FY12. I was hoping for an improvement on this metric.
RNC have highlighted that they should be earning greater revenue from the rent roll assets (ref to Macquarie report). This supports my view that industry competitors must be achieving much greater margins than RNC to justify the industry’s rent roll transaction multiples.
RNC state the rent roll is valued at $60m and they earn EBITDA of $5.5m from this asset. This implies an EV/EBITDA multiple in excess of 10x. Maybe I don’t understand the industry properly, but a multiple of 5x EBITDA should be what a reasonable industry participant would be willing to pay. This implies RNC should be capable of earning $12m in EBITDA each year.
Interestingly the company is trading at roughly half the implied rent equity value of $48.6.
Final div of 0.4c is below my forecast of 0.6c. Mgmt are managing expectations of future payouts, IMO. They have the cash. My guess is that they will attempt to maintain the FY14 interim and final divs at 0.4c until the growth investments start paying off in FY15. The 10% discount on the DRP is interesting.
During FY13, mgmt have focused the business for the faux sale, held off on growth initiatives and tightened up costs I think the next 12 months may suffer as a result. The tone and wording of the annual report seems to suggest FY14 will be a year of investment with delayed benefits.
RUN seems to be morphing itself into an IT company. Hopefully the platform profits will eventually rival the property business units. I think RUN have set a great precedent with AgentPlus. The new business initiative, Maintenance Matcher, could be well accepted by the market. I know someone who owns a decent portfolio of residential assets and managing the maintenance has been a huge headache to overcome. Ultimately he opted to hire a dedicated, under-utilised/inefficient, maintenance employee. I think I’ll run the logic of Maintenance Matcher past him.
It brought a smile to my face to see mgmt acknowledge that they can grow the property mgmt business organically for c.1x revenue vs acquisition metrics of 2.5-3x. Low risk of a silly acquisition.
It would appear mgmt have accepted the RTI deal is not going to happen. It will be interesting to see if RUN becomes the “manager” of RTI’s RMA’s. This could be a source of increased cashflow with minimal capital investment.
To conclude, the FY13 result was luke warm to me. I like the new initiatives and I think management and the business are now in a great position to deliver cashflow growth. I really like the scalability of RUN. Focusing on growth could yield very impressive results with minimal fixed investment. Given the small base, a little upside will make a massive difference to the results.
FY14 might be boring as the growth initiatives are implemented, but FY15 could prove very interesting indeed.
RNC Price at posting:
24.0¢ Sentiment: Hold Disclosure: Held
