Sunland Group: A dollar for 50 cents

Sunland is retreating to home turf and consolidating its business. A sustainable turnaround would make today's price cheap

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Sunland Group Limited (ASX: SDG) has put its six star hotel, Gold Coast Palazzo Versace up for sale, with expectations of reaping $80million – according to a report in today's Australian Financial Review.

Sunland swapped holdings in Palazzo Versace Dubai and its half share in D1 Residential Tower, Dubai with its United Arab Emirates joint-venture partner, Enshaaa, for the 49 per cent of the Gold Coast Hotel it didn't already own.

Given Sunland now owns 100 per cent of the hotel, it should be more attractive to prospective buyers and easier to sell.

Coming back home

It looks like Sunland's international expansion plans have come to an end, after the group was forced to write down $209m in its Dubai assets in 2009. The last two years have seen the company extricate itself from most of its Dubai business. The company only has minor holdings in Dubai now.

Sunland is moving to focus on its core business of property development, rather than property ownership. It is also getting out of property ownership and development in the Middle East, moving back to concentrate on Australian developments.

The company recently purchased Mariners Cove and Marina site on the Gold Coast, not far from the Palazzo Versace, for A$13m, although it has no immediate plans to develop the site. The site was acquired from appointed receivers – so possibly purchased at a knock down price.

Financial Results

For the six months to December 2011, Sunland announced a profit of just $185,000, down 97 per cent on the prior corresponding period, on revenues of $79m. Net tangible asset per share is $1.69, compared to the current price of 72.5 cents, which indicates the company is trading at less than half its net asset value.

Of course, that net asset value can change over time, and we don't know how conservatively the assets have been valued.

The company has also been buying back shares, with shares outstanding now just 198m. The most recent buyback will see shares reduce to approximately 150m.

The company has also forecast to make a profit for the 2012 year of between $14m and $15m. Based on 150m shares, that equates to earnings per share of around 9-10 cents, putting Sunland on a forecast P/E of between 7 and 8.

Risk factors include a negative cash flows for the first half of $50m, and total debt of $75.7m, offset by $20m in cash, although the company has said that it will remain focused on capital management initiatives and its core businesses until market conditions and investor sentiment improve. The cash flow issue could just be a timing-related rather than structural, which should rectify itself in the company's full year accounts.

Although the company doesn't currently pay a dividend, management have reiterated their goal of paying dividends in future.

The Foolish bottom line

Trading at less than half its net tangible assets alone means that Sunland should be worthy of further research. Despite the weak market conditions, the company has also re-iterated its forecast for the 2012 financial year of net profit of $14m-$15m, suggesting it's cheap.

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Motley Fool contributor Mike King doesn't own shares in Sunland. Take Stock is The Motley Fool Australia's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

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