Tamawood Limited (ASX: TWD) was my top stock pick for June. Back then the share price was $3.41 and earlier today it was $3.30. Despite the slight fall, I am positive about the company and continue to hold shares myself.
Tamawood released its annual report on Friday and the stock fell by more than 2% on the news with about $150,000 of stock traded. This is quite large volume for Tamawood which typically trades $25,000 in a day. Shares are down a further 1.5% today on lower volumes.
For me, the company delivered good results. Revenues grew 18% to $95.3 million and profit was up 27% to $6.4 million. Earnings per share were 25.1 cents up from 19.8 cents last year. The company guided that the 2016 results are likely to be even better.
Tamawood is based in Queensland where it has established a home building business under the Dixon brand. The Queensland construction division generates 83% of group revenue before eliminations and 77% of group profit before tax.
The outlook for the Queensland housebuilding industry is good. Housing starts are expected to ramp up from 19,360 in 2013/14 to 26,830 in 2016/17 according to projections from the Housing Industry Association (HIA).
Tamawood also has an energy certificates trading business, sells franchises and recently started operations in New South Wales. This year it expects to open its office in Melbourne. The energy certificates business does not contribute significant profits to the group but there is lots of potential for the New South Wales, Victoria and franchise operations.
New South Wales revenues grew from $2.6 million to $7.1 million and profits before tax rose from $0.2 million to $0.5 million. Whilst new housing starts are expected to be flat over the next few years in New South Wales and Victoria, Tamawood should still enjoy strong growth in these states because its operations are so new.
The number of franchises grew 17% to just 21 last year, but profit before tax was up 57.3% to $1.7 million. The franchise business enjoys strong margins compared with house building because employee and material costs are carried by the franchisees. In 2015, profit before tax margins were 9.6% in the Queensland house building division versus 46.9% for the franchise division.
It is not difficult to work out that Tamawood is a low-cost operator from its marketing tagline "More4less". It has developed a proprietary operating system which streamlines the housebuilding process and forms part of an attractive package to franchisees. Another way it achieves cost advantage is through standardisation and bulk purchasing. Finally, the company is debt free which is a significant advantage over competitors when you consider that the average interest expense as a percentage of earnings before interest, tax, depreciation and amortisation for the industry is 31.8% according to the HIA.
Tamawood is not a developer and so does not bear the risk of financing projects. Consequently, it can pay out most of its profits as dividends and still has enough money left to expand operations. Total dividends per share for 2015 are 25 cents, up from 23 cents last year which equates to a dividend yield of 7.6% at current prices.
As a builder, most of Tamawood's cost base is variable and so it would be able to right size quickly in a downturn. The business has been around since 1959 and was listed in 2000. Since listing the share price has risen 560% from 50 cents to $3.30, evidence that the company has proven resilient regardless of industry conditions.
