The Villa World Ltd (ASX: VLW) share price is sitting 1.36% higher at $1.86 on Wednesday afternoon as the company reported a 2% increase in profit to $17.6 million for the half-year.
Despite reporting 611 wholly owned settlements (down from 626 pcp), the real estate developer saw revenue increase by 15% to $232.7 million whilst increasing its gross margin to 57.2% in the half.
However, while the headline numbers for Villa World look solid, the cracks are beginning to show as residential real estate around the country begins to fall.
Sales for the half fell 30% to 517 lots for the half on the declining market, customer sentiment and availability of finance (i.e. bank lending). The revenue mix remains weighted towards house and land, however, this has decreased from 66% in 1H18. The company also reported $340.4 million sales carried forward into 2H19 with 1,126 lots.
The company's balance sheet remains solid, despite a $19.7 million decrease in net tangible assets. Gearing decreased slightly throughout the period, however, on a look-through basis this was up from 28.9% in FY18 to 30.8% in the half.
Fewer acquisitions saw a net cash inflow from operating activities of $46.7 million whilst net cash decreased $2.9 million from 1H18.
The company maintained its $0.08 per share fully-franked dividend in 1H19 as gross margin rose from 23.7% in 1H18 to 24.6% for the half. Positively for investors, management intends to maintain the 50-75% annual NPAT payout policy going forward.
The company expects to see FY19 gross margin to stay within a 23 – 25% range with cash outflow for acquisitions of ~$32 million.
Foolish Takeaway
Overall, I think the report is broadly positive for Villa World with net profit, EBITDA and profit all up. I think the reaction will be fairly muted given the declining sales data and lower net tangible assets in the half. The residential real estate market, particularly house and land packages, has significant headwinds and I'd expect lagging data to be a killer for Villa World in 2H19.
In the meantime, I'd be looking at A-REITs for income such as Mirvac Group (ASX: MGR) or Stockland Corporation Ltd (ASX: SGP) to ride out the storm in the next 6-12 months.
