Shares in JSE-listed property development group Balwin Properties, traded 1.3% higher on Monday as the investment community attempted to analyse full-year results for the 12 months ended 28 February 2018.

The high-level commentary saw revenue down 9%, profit down 26%, dividends down 32% and Net Asset Value up 15%.

For those not familiar with Balwin, the company is aiming to deliver the development of 39 951 apartments over 25 sites during a 14 year development window. Typically it will sell these units in either single bathroom format for R599 000 or 2-bedroom, 2 bathroom format for R990 000. Some of the developments include: Amsterdam, Kikuyu, The Polo Fields, The Whisken, The Blyde and De Zicht and Paardevlei Lifestyle.

The positives:

• You are currently buying a business which is operating on a price to earnings multiple of just under 5 times earnings and you receive a dividend of around 5%.
• Management has been generous with dividends since the business listed
• The company is well positioned to deliver affordable housing to a growing South African middle-class. This will depend on the ability of the economy to create new jobs while protecting property rights.
• While “Personality” investing has come in for a bit of stick in recent years, the business is supported through South African business heavyweight Jonathan Beare.

Challenges facing Balwin

Cash is becoming an issue:

On the surface, the Balwin story is one of a good business being negatively impacted by a weak middle-class economy in South Africa. However cash doesn’t lie and it could be argued that if some of the operational challenges drag on much longer, shareholders may find themselves having to provide a safety net for the business with an injection of new capital.

The company started the year with R546m in cash and ended the year with R100m in the bank. Bearing in mind that the company needs to distribute R99m in dividends in June (Gross) – it becomes a balancing act quite quickly.

Related party transactions:

Balwin deserves credit for its transparent disclosure of “Related Party” transactions (as opposed to being a footnote in the annual report) but it’s hard to ignore R250m+ of related party sales, especially in the context of the cash and profit position.

Based on the disclosure, CEO Steve Brookes purchased R180m of units with at least a portion made under the “group staff discount policy”.

It can be argued that the directors see value in the units themselves but this does create a bit of an anomaly when it comes to reporting sales figures. Remember that Balwin sets itself the goal of selling between 2000 and 3000 units per year – in the 2018 year, the group sold 2084 units compared to the 2711 in the previous year.

Too generous with the dividend?

Brookes holds roughly 35% of the company and is handsomely rewarded by a dividend policy which sees 30% of the after-tax profit being distributed to shareholders. In a business where the cash position is becoming a little tight, it could be argued that this policy should be revisited in the near-term… especially if management is recycling the cash back into the business for units in their personal capacity.

Land and zoning issues:

Analysts who attended the results presentation made a point that Balwin was targeting the development of land currently owned by sugar group Tongaat While this market is potentially interesting, there is still a lot of uncertainty around populist land policies and the impact this might have on future developments.

Balwin management have indicated that all zoning issues have been resolved but this article suggests that industry peers continue to face challenges (https://www.moneyweb.co.za/news/south-africa/property-development-in-joburg-paralysed/)

Summary:

In principle, Balwin remains an interesting investment opportunity but the cash position needs to be relentless interrogated. It makes no sense for investors to enjoy a healthy short-term dividend if they are going to be expected to provide additional capital in the coming year.