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Fleetwood Corporation: A picks & shovel play on the WA mining boom

Fleetwood Corporation Limited (ASX: FWD) is debt free, and a ‘picks and shovels’ play on the booming WA mining economy. The company looks attractive, but the shares are fully priced. 

Fleetwood operates two distinct divisions. The largest division provides manufactured accommodation, mainly for the Western Australia resources sector. For the six months to December 2011, revenues for this division were down by 7% to $125.2m, but EBIT up by 37% to $37m. This division operates the largest accommodation village in Karratha, Searipple, which is expected to generate strong revenues as more resources projects start up in the region.

The company’s second division manufactures caravans, parts and accessories for recreational vehicles, as well as canopies and trays for commercial vehicles. Revenues were down by 12% to $80.6m, and EBIT down 61% to $4m, mainly due to a decline in consumer sentiment for discretionary items, i.e. people are too worried about their other bills to spend a large amount on a caravan.

Overall, the company reported a 9% fall in revenues, but net profit was up 10% to $26.9m over the previous corresponding period. The difference was mainly a reduction in raw materials expenses used to manufacture accommodation and caravans and associated accessories, with expenses down from $96.5m in 1H 2011 to $68.9m in 1H 2012.

No debt

What is pleasing is that strong cash flows of $47.6m allowed Fleetwood to repay all its debt, with the company how having net cash of $13m as at 31 December 2011. This seems to be a trend for many companies in many different sectors recently (1300 Smiles Limited (ASX: ONT), ARB Corporation Limited (ASX: ARP), Noni B Limited (ASX: NBL) and Forge Group Limited (ASX: FGE), all have either no debt or net cash balances.

Companies are either repaying debts, or ensuring cash on the balance sheet more than covers the company’s debt  which is very similar to how consumers are acting at the moment, putting cash away for a rainy day, and avoiding big spends on discretionary items.

Outlook

Fleetwood expects to see strengthening demand in the resources sector in WA & Qld, but expects continuing soft conditions in the recreational vehicle division. As long as the demand for commodities remains high, Fleetwood’s manufactured homes division should prosper.

The company is also moving towards sourcing cheaper supply from Asia which should help both its divisions reduce their costs.

The Foolish bottom line

Generating high returns on equity (28% for 2011), net cash in the bank and a forecast fully franked dividend yield of 5.8%, the company appears attractive. The only issue is the price. Currently trading at $13.02 and on a forecast 2012 P/E of over 14, it appears fully priced.

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Motley Fool contributor Mike King owns  shares in ARB Corporation and Forge Group, but none of the other companies mentioned. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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