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Is Villa World Ltd’s 9% fully franked dividend yield too hard to ignore?

Credit: stratman

Shares of residential home builder Villa World Ltd (ASX: VLW) are trading more than 4% higher today after it released its FY16 half year results to the market.

Investors were clearly pleased with the 57% increase in net profit after tax (NPAT) to $20.4 million. Other highlights from the result included (all figures compared to first half FY15):

  • Revenue growth of 49% to $200.2 million
  • Lots settled increased by 41% to 497 lots
  • Average monthly settlements increased from 59 per month to 83 per month
  • Gross margin increase of 14% to 27.5%
  • Earnings per share (EPS) increase of 33% to 18.5 cents
  • Dividend per share increase of 33% to 8 cents
  • Net tangible assets of $2.09 per share

Despite concerns surrounding the slowing property market, Villa World has delivered what appears to be a fairly robust earnings report.

Interestingly, Villa World has limited exposure to the Sydney and Melbourne residential markets which appear to be showing the biggest signs of cooling down. Instead, 86% of its revenues were generated in Queensland where market conditions have been more favourable for more affordable housing options.

As a result of increased lots settled during the period, Villa World generated very strong operating cash flows of more than $106 million. This enabled the company to acquire new land worth $53.1 million and repay borrowings to the value of $45.7 million.

Although borrowings were significantly paid down during the course of the first half, the company will be required to pay $89.5 million for land acquisitions in the second half. This will increase gearing from the current level of 9.4%, but will still remain well within the company’s upper limit of 30%.

The strength of its operating cash flows also enabled Villa World to increase its interim dividend to 8 cents per share. Importantly, the company now expects its FY16 full year dividend to increase to at least 18 cents per share. Based on the current share price of $2.06, this would mean investors will receive a fully franked dividend yield of at least 8.7%. When franking credits are included this would result in a pre-tax yield of around 12.5%.

Outlook

Villa World has re-affirmed its sales target of 1,000-1,200 lots for the full year and has already carried forward 311 sale contracts into the second half of FY16 with a gross value of $107.7 million.

The company is also targeting NPAT of $32.6 million and EPS of 29.6 cents for the full year. This would represent an increase in earnings per share of around 15% compared to FY16 and is based on continuing momentum in sales and consumer confidence remaining stable.

Foolish takeaway

Although investors remain concerned about the impact of lower residential property prices on Villa World, I believe the shares are currently undervalued considering the product and demographic the company targets. Pockets of the Sydney and Melbourne residential markets may come under pressure in the near term, but Villa World’s mid-price point homes mean its product should remain in high demand especially in its core Queensland market.

Investor fears should be alleviated somewhat following the release of this earnings report with sales momentum expected to remain strong for the remainder of the year especially as movements in interest rates are unlikely.

With the shares trading on a forecast price-to-earnings ratio of less than 7, a dividend yield of nearly 9% and a discount to its net tangible assets, I think investors could see further upside in the share price.

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Motley Fool contributor Christopher Georges owns shares of Villa World. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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