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Is it time to invest in property developers?

Cedar Woods Limited (ASX: CWP) yesterday (April 16th 2012), re-confirmed its net profit after tax for the 2012 financial year at around $34m. Revenues are forecast to be $179m for the year, a rise of 36% over 2011’s result.

The company is a property developer with projects located in urban growth corridors in Victoria and Western Australia, which include integrated housing developments, business parks, mixed use developments and several master planned communities. Cedar Woods also manages property developments on behalf of other entities.

Financials

Many of the company’s properties were acquired some time ago at much lower values than they are worth today, and management believes the market value of its assets is substantially in excess of the current share price of $3.47 and book value of $2.17.

The business has net debt of $61.5m and a net debt to equity ratio of 45%. The company has a primary debt facility of $110m, which has been extended to 30th November 2014. It’s also nice to see the company referring to its gearing ratio as net debt divided by equity, rather than the misleading gearing ratio of net debt plus equity divided by equity. The former compares the debt to the amount of equity in the company – what they owe vs. what they have. The latter compares debt to the total capital base, which gives a lower (and therefore less scary) result.

Directors’ holdings

Directors hold approximately 30% of the company, which we like to see. Directors with so much ‘skin in the game’ are very likely to have a very keen appreciation of  the interests of shareholders.

Shareholders who have held shares for at least 12 months are also entitled to a 5 per cent discount off the listed purchase price of any of the company’s residential lots.

Capital raising

Cedar Woods has recently announced a $25m capital raising via a share placement to institutional investors, which was over-subscribed. The company has also announced a share purchase plan, capped at $5m, for retail investors to also purchase shares at $3.45. This will result in an additional 8.7m shares being issued.

Risks

As for most residential property related businesses, a fall in housing prices is the biggest risk to the business. While many commentators have been predicting a crash or fall in Australian housing prices for the last ten years, it hasn’t happened – yet.  It’s impossible to know whether we’ll suffer a property market crash, but personally, I don’t believe we will. That doesn’t mean prices won’t stagnate – perhaps for a long period. To mitigate the risk of investing in Cedar Woods, investors should consider buying in with a substantial margin of safety.

Outlook

The company has already secured $51m in presales for projects completing in financial year 2013, and has confirmed its forecast for the 2012 financial year. The company has new projects due to be released soon, in both Victoria and Western Australia, and believes that these projects will contribute to earnings in 2013 and beyond. Management believe demand will remain strong, supported by a shortfall of new housing and low vacancy rates.

Should interest rates fall in the near term (not that I’m predicting anything!), that should be a positive for Cedar Woods, by improving affordability and possibly increasing demand for housing.

The Foolish bottom line

Cedar Woods is currently trading on a trailing P/E of 8.7 with a forecast P/E of 7.3. The company is also forecast to pay a dividend of 23 to 24 cents, resulting in a 6.8 per cent dividend yield, fully franked. (Both forecasts include the additional 8.7m shares to be issued).

The company looks cheap and according to my valuations, offers a decent margin of safety and may be worthy of further research.

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Motley Fool contributor Mike King doesn’t own shares in Cedar Woods. 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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