FWD - Fleetwood Limited

[prawn_86]

Re: FWD

Can anyone explain to me the reason for the current FWD sell-off? It seems totally illogical for such a successful and fundamentally sound company.

Hi Benadem,

Welcome to ASF.

Why do you think this is a fundamentally sound company?

I dont know much about FWD, but at current prices their dividend is >7% so it must be looking tempting for a lot of people. I will have to check EPS growth and dividend stabilty, and then look for a turnaround if i am to invest

 

[tinhat]

Re: FWD

Can anyone explain to me the reason for the current FWD sell-off? It seems totally illogical for such a successful and fundamentally sound company.

I guess it is caught up with the mining services sector sentiment. It's on my watch list. Good dividend.

 

[benadem]

Re: FWD

Hi Benadem,

Welcome to ASF.

Why do you think this is a fundamentally sound company?

I dont know much about FWD, but at current prices their dividend is >7% so it must be looking tempting for a lot of people. I will have to check EPS growth and dividend stabilty, and then look for a turnaround if i am to invest

Zero long-term debt, consistent earnings growth over 7 years, steady sales growth, high cash flow, high interest cover, 23% and consistent ROE, etc. and of course a high dividend.

 

[Ves]

Re: FWD

Zero long-term debt, consistent earnings growth over 7 years, steady sales growth, high cash flow, high interest cover, 23% and consistent ROE, etc. and of course a high dividend.

How does it usually perform outside of boom periods? Do you know what its metrics look like when the mining cycle has reached its peak and started to decline?

Current pay-out ratio is about 83%. The ROE of around 23% that you quoted (I prefer ROIC btw) if it is maintainable on new capital implies a growth rate of between 3% and 4% going forward. If revenue grows at this rate, but margins contract in a material way the bottom line will be hit hard.

I won't say I have looked at this in any detail and this is back-of-the-envelope type musing, but with the risk of contractionary economic conditions (not saying this will happen) dampening the tailwinds of the last 5-7 years in the industry I would say that this is still pretty much fully priced.

The lack of any margin of safety at the moment does not justify the price going into the medium term IMO.

 

[white_goodman]

Re: FWD

Zero long-term debt, consistent earnings growth over 7 years, steady sales growth, high cash flow, high interest cover, 23% and consistent ROE, etc. and of course a high dividend.

dividend yield is getting higher

big support level here atm looking at a yahoo finance chart

ill wait before i get in

 

[McLovin]

Re: FWD

How does it usually perform outside of boom periods? Do you know what its metrics look like when the mining cycle has reached its peak and started to decline?

Here's EBIT margin from 2003 to 2012...

10.02% 12.42% 10.33% 12.27% 12.94% 14.64% 14.58% 18.80% 16.01% 18.67%

Going further back

2000 9.2%
1999 12.2%
1998 10.5%

So I guess somewhere around 9-12% is about right (which makes sense over the long run). Taking this years revenue, you'd end up with ebit with a range of 36.5m-48m as compared to 91m.

Margins mean revert, as you know. We've seen it with mining services companies, given FWD's exposure to mining it will be interesting to see what happens. I wouldn't be getting involved at the moment though. With a high payout ratio, surely the divie will be under pressure if/when margins start to revert.

 

[Ves]

Re: FWD

Here's EBIT margin from 2003 to 2012...

10.02% 12.42% 10.33% 12.27% 12.94% 14.64% 14.58% 18.80% 16.01% 18.67%

Going further back

2000 9.2%
1999 12.2%
1998 10.5%

So I guess somewhere around 9-12% is about right (which makes sense over the long run). Taking this years revenue, you'd end up with ebit with a range of 36.5m-48m as compared to 91m.

Margins mean revert, as you know. We've seen it with mining services companies, given FWD's exposure to mining it will be interesting to see what happens. I wouldn't be getting involved at the moment though. With a high payout ratio, surely the divie will be under pressure if/when margins start to revert.

You've pretty much nailed it on the head. I'm glad someone took the time and had a look below the surface and answered the questions at the top of my post. I deliberately wrote them because I think if you bother to try and answer them with most stocks with cyclically high margins they will allude to some of the major issues one needs to consider. It could take years for mean reversion to play out in some of course, but I agree it will happen eventually and unless you have a crystal ball it would be wise to tread with complete caution at the moment. It's not worth the risk.

 

[Klogg]

Re: FWD

Here's EBIT margin from 2003 to 2012...

10.02% 12.42% 10.33% 12.27% 12.94% 14.64% 14.58% 18.80% 16.01% 18.67%

Going further back

2000 9.2%
1999 12.2%
1998 10.5%

So I guess somewhere around 9-12% is about right (which makes sense over the long run). Taking this years revenue, you'd end up with ebit with a range of 36.5m-48m as compared to 91m.

Margins mean revert, as you know. We've seen it with mining services companies, given FWD's exposure to mining it will be interesting to see what happens. I wouldn't be getting involved at the moment though. With a high payout ratio, surely the divie will be under pressure if/when margins start to revert.

Wow - I took a look at this stock and simply thought the margins won't hold up, but that's where my analysis stopped (yeah, basically what everyone else mentioned). I never would have thought to take a look at it from a cyclical standpoint over such a long period of time...

Definitely learnt something today
Thanks

 

[McLovin]

Re: FWD

I never would have thought to take a look at it from a cyclical standpoint over such a long period of time...

History is your friend, although I know Buffett has said that if history was all you needed the Forbes list would be filled with librarians.

I prefer Mark Twain's quote..

"History doesn't repeat but it rhymes".

 

[craft]

Re: FWD

Here's EBIT margin from 2003 to 2012...

10.02% 12.42% 10.33% 12.27% 12.94% 14.64% 14.58% 18.80% 16.01% 18.67%

Going further back

2000 9.2%
1999 12.2%
1998 10.5%

So I guess somewhere around 9-12% is about right (which makes sense over the long run). Taking this years revenue, you'd end up with ebit with a range of 36.5m-48m as compared to 91m.

Margins mean revert, as you know. We've seen it with mining services companies, given FWD's exposure to mining it will be interesting to see what happens. I wouldn't be getting involved at the moment though. With a high payout ratio, surely the divie will be under pressure if/when margins start to revert.

Those EBIT Margins look a bit different to what I have



The run up from early 2000's looks fairly obvious – the real question is whether the 23 year regression line of the margin is representative of underlying business improvement? The answer has a big impact on where margins may bottom.

Margin is only part of the profitability equation the other half is asset utilisation which tends to be equally important for true cyclical companies.

 

[McLovin]

Re: FWD

Those EBIT Margins look a bit different to what I have

I took mine from AFR (Morningstar) for the 03-12 period and from the annual report from 98-00

From your longer dated graph, it does look like margins plateaued in the mid-90's and then took off again once the boom started.

The period of the early 90's might have been affected by the recession, so margins were low at the beginning of the period.

 

[Ves]

Re: FWD

Those EBIT Margins look a bit different to what I have

The graph you posted looks like it quotes the operating margin, which will be based on EBITDA. And McLovin is using EBIT margin.

The actual trend line, I would suspect, should be fairly similar unless the ratio of depreciation to revenue changed materially over time...

Another consideration, and as I mentioned I am not intimately familar with this business, is their operations may have changed over time, from lower margin operations to higher margin operations, which combined with the resources super-cycle, would help the trend.

I would recommend that those who are interested in the company have a look into that.

 

[craft]

Re: FWD

Those EBIT Margins look a bit different to what I have

This intrigued me so I took a bit of a look at FWD.

My data supplier strips out rental revenue from operating revenue which it uses to calculate EBIT margin (bit weird really cause depreciation on rental assets is included in EBIT)

One observation from my little look at FWD revolves around the depreciation rate on the rental assets – It really doesn’t seem to correspond at all with rental revenue – which makes profits hugely sensitive to rental revenue (mining related) also opens up the possibility of accounting creativity in the short run.

Next.

 

[prawn_86]

Reverse speeding ticket issued today and the usual "we know nothing" response

 

[McLovin]

Re: FWD

One observation from my little look at FWD revolves around the depreciation rate on the rental assets – It really doesn’t seem to correspond at all with rental revenue – which makes profits hugely sensitive to rental revenue (mining related) also opens up the possibility of accounting creativity in the short run.

Hi craft

Can you expand a bit on that? I'm having a look but I can't see what you mean.

Thanks

 

[craft]

Re: FWD

Hi craft

Can you expand a bit on that? I'm having a look but I can't see what you mean.

Thanks

2012 example. Rental revenue 107 Million - Total plant & Equipment depn less than 10 Million (they don’t split out rental accommodation depn)

Stick a village in the middle of the desert – make big rentals now and make minimal depreciation charges = good reported profits now!


My guess is fixed buildings included as rental plant are only being depreciated at 2.5% as per the tax schedule. (no build up in deferred tax) That doesn’t seem high enough to me given the risks in long term occupancy.

The report stated depreciation on Plant ranged 2-5%-50% lots of scope there. [What earnings figure do you want this year?]

Next.

 

[McLovin]

Thanks for that.

 

[fanger]

Fwd has been getting hammered of late along with the rest of the mining services companies.

 

[tinhat]

Re: FWD

2012 example. Rental revenue 107 Million - Total plant & Equipment depn less than 10 Million (they don’t split out rental accommodation depn)

Stick a village in the middle of the desert – make big rentals now and make minimal depreciation charges = good reported profits now!


My guess is fixed buildings included as rental plant are only being depreciated at 2.5% as per the tax schedule. (no build up in deferred tax) That doesn’t seem high enough to me given the risks in long term occupancy.

The report stated depreciation on Plant ranged 2-5%-50% lots of scope there. [What earnings figure do you want this year?]

Next.

About a month ago I spoke with an analyst at the end of a seminar who specialises in the mining services/capital goods sector and mentioned your thesis to him and he's thoughts were that FWD were depreciating more than enough. He offered for me to call him in his office so he could look into the figures more and we could discuss it further. Alas, FWD has been on my watch list but I have no need to make a buy decision for a while it seems, so I've been keeping my powder dry and holding off calling the analyst. He did say that they were looking to do a major overhaul of Searipple Village in Karatha and that if RIO don't renew then that will bring that forward. He also felt that the economics of the Gladstone accommodation market were sound. (I held DCG at the time of our converstation). Err, my memory of the conversation is sketchy though.

 

[skc]

Re: FWD

About a month ago I spoke with an analyst at the end of a seminar who specialises in the mining services/capital goods sector and mentioned your thesis to him and he's thoughts were that FWD were depreciating more than enough. He offered for me to call him in his office so he could look into the figures more and we could discuss it further. Alas, FWD has been on my watch list but I have no need to make a buy decision for a while it seems, so I've been keeping my powder dry and holding off calling the analyst. He did say that they were looking to do a major overhaul of Searipple Village in Karatha and that if RIO don't renew then that will bring that forward. He also felt that the economics of the Gladstone accommodation market were sound. (I held DCG at the time of our converstation). Err, my memory of the conversation is sketchy though.

If you depreciate a village over 20 years but in actual fact it will only be occupied for the first 3-4 years (as in the construction duration of the LNG projects in Gladstone), you will get larger profits in the early years and you will, eventually, have to write down on the asset value of the village by year 5.

I will put on record here that I think probability favours that a high percentage of the LNG projects will turn out to be complete busts. Some already don't earn their cost of capital already. Some might get scretched altogether. A mining accommodation village is the ultimate of property boom... and it will go out with a bang.