AV Jennings seeing light at the end of the tunnel

It’s never fun to report a loss, which is what AV Jennings (ASX: AVJ) did in its preliminary final report released last week. The best thing it can say is that it wasn’t as bad as last time — the loss was 50% smaller than last year. Can a negative by a plus?  For us it can because it can show a changing of the tide for a company and industry.

The company admits to a sagging first half, but of the $158.5 million of full-year revenue, $105.6 million came from the second half. The profit after tax for the second half was $3.8 million, whereas the first half to 31 December 2012 was a loss of $3 million before inventory provisions — a net movement of $6.8 million upwards.

The inventory provisions are write-downs of inventory value based on mark to market accounting practices. This happened to Stockland (ASX: SGP) also when it released its preliminary full year numbers last week. Things may be improving, but these companies are forced to take a hit on their balance sheet to reflect the current market valuation of property or land. AV Jennings’ write-down on inventory was $22.9 million — ouch! The second half NPAT of $3.8 million got gobbled up by that hit. The only good thing about it was that last year the write-down was $48.6 million.

This report is a tale of two halves. That write-down was only for the first half of the year, none in the second. The company cites that consumer confidence in New South Wales (its key market) seems to have lifted over the last six months, reversing a decade-long trend. Southern Queensland is beginning to realign itself with other eastern capitals in terms of price improvements, which it interprets as a burn-off of excess supply of housing built up from 2010-2011. Victoria and South Australia are stable.

Changes in the market and consumer sentiment are attributed to low interest rates and inflation, underlying house shortages in some regions, positive population growth, improvements in affordability and a relatively stable economic outlook over 2014-2015. The All Ords Index (ASX: XAO) will flag that market change before it really happens.

Foolish takeaway

Just like how winter doesn’t change to spring like a flick of a switch, it seems gloomy and cold until a series of warm days start to happen more than cold days. The business climate is the same, so good investors know when to start positioning themselves to get the best return. Even if you don’t pick the bottom, great gains can still be made if you take action well before it heats up too much.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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