Our resilient housing market has been holding the line against the headwinds that threaten to trigger a painful drop in home prices – so far. But Devine Limited’s (ASX: DVN) half year results show how close the industry could be sailing to the wind. The small cap homebuilder announced today that revenue from operations had collapsed 78% to $49.5 million and that net profit has been cut by a quarter to a loss of $28.4 million in 2017 (its financial year ends in December). More worryingly is the admission that its future lies in the hands of its banker, Australia…
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Our resilient housing market has been holding the line against the headwinds that threaten to trigger a painful drop in home prices – so far.
But Devine Limited’s (ASX: DVN) half year results show how close the industry could be sailing to the wind.
The small cap homebuilder announced today that revenue from operations had collapsed 78% to $49.5 million and that net profit has been cut by a quarter to a loss of $28.4 million in 2017 (its financial year ends in December).
More worryingly is the admission that its future lies in the hands of its banker, Australia and New Zealand Banking Group (ASX: ANZ)!
Devine has drawn down $51 million from a multi-option facility (MOF) offered by ANZ Bank and $47 million is due at the end of next month.
As the homebuilder only has $295,000 as of December 31, 2017, it could be forced to sell its housing projects. Devine has $41 million in land held for sale that is earmarked as “current assets”, meaning these are close to being ready for sale to the public.
That isn’t enough to close out debt. But it has another $116.3 million of land held for sale that is classified as “non-current”.
“The directors note that, if the MOF is not refinanced by 31 March 2018, the group currently does not have the immediate capacity to repay the facility in full, nor does it currently have readily available alternate sources of liquidity,” Devine said in its directors’ report.
A forced sale would be terrible news for Devine’s shareholders but it will also be bad news for the wider industry due to the potential domino effect.
A senior industry player that I spoke with recently told me that any correction in the property market will start from the small players – not the big end of town. He pointed to the private developers and we have already seen some anecdotal signs that small private homebuilders are feeling the squeeze.
Devine’s results today make me wonder if the contagion is spreading to the listed space.
If a bank is forcing the sale, it would only be interested in covering its loan exposure and not ensuring the best potential price on the sale. The lower sale price could prompt others to cut their asking prices as well, thus triggering the domino effect at a time when our housing market is walking a tightrope.
We shouldn’t be too alarmed at this stage though as one would think it won’t be in ANZ Bank’s interest to trigger such an event.
But what it does mean is that investors may need to change the way they value property stocks, including the big boys like Mirvac Group (ASX: MGR), Stockland Corporation Ltd (ASX: SGP) and Lendlease Group (ASX: LLC).
These companies have delivered decent results this month but investors have been focusing on growth, sales and property prices more so than anything else.
The spotlight now needs to be on the health of their balance sheets and this reminds me of how mining giants BHP Billion Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) survived and rebounded from the commodities downturn by preserving capital and paying down debt.
Conservatism is the new game for the property sector!
But there are reasons to feel optimistic about other parts of the market. In fact, the experts at the Motley Fool are particularly bullish about the prospectus of one sector.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, and Rio Tinto Ltd. 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.