16/05/2017 - 11:47

Investors back Peet’s chirpy tune on growth

16/05/2017 - 11:47


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ANALYSIS: The fortunes of an iconic residential property developer are a pointer to the health of WA’s economy.

Investors back Peet’s chirpy tune on growth
Brendan Gore is confident the WA market will ‘normalise’ during the next year or so. Photo: Attila Csaszar

Most people who live in Perth will have been affected in some way by the activities of Peet, whether they know it or not.

Peet is Western Australia’s oldest surviving residential property developer, and is a business that plays an interesting role as a canary in the state’s economic minefield.

The nature of Peet’s 122-year-old business – buying vacant land for residential development, servicing it with roads, water, power and other amenities, and then selling it to homebuyers – means that demand for its product is a key forward indicator of future economic activity.

Peet’s recent financial performance has been modest, with sluggish demand for residential land in WA offset by strong demand in other states, especially Victoria.

That picture could be changing, with Peet chief executive officer Brendan Gore noticing a number of telltale indicators pointing to a recovery in WA land demand, with astute professional investors detecting the same signals.

“We are one of the first businesses to see a change in the economy, either up or down,” Mr Gore said in an interview with Business News.

“We could see two years ago that the economy was turning down, which it did, but demand for land in WA right now is probably tracking sideways, and that’s better than it was last year.”

Peet was a household name in Perth many decades before Mr Gore was appointed CEO in early 2007, with a string of successful residential property developments to its credit, including parts of Dalkeith, Scarborough, Mullaloo, Claremont, Swanbourne, Canning Vale, Como, South Perth, Kalamunda and Dianella.

Riding out the downturns in an economy like that of WA with its close ties to the extreme cyclical movements of commodity prices is embedded in the corporate culture of Peet, which has developed smart capital and risk management systems, including the use of land syndicates that utilise capital from rich locals, partnerships with builders, and careful use of debt.

Knowing which way the market for residential property is moving is a key to Peet’s longevity and includes an interesting ‘negative’ measurement of the ability of land buyers to complete a deal.

Most block sales, especially to first homebuyers, start with a small deposit, generally around $1,000.

At the depths of WA’s recent downturn, the cancellation rate of deals on which a deposit had been paid was as high as 45 per cent, largely because banks had tightened their risk assessment criteria for WA customers, especially mine workers, meaning loans on land were hard to get.

Today, the cancellation factor has contracted back to between 25 and 30 per cent, with banks more willing to lend in WA, interest rates holding at near record low levels.

“There is no Armageddon out there,” Mr Gore said. “Activity is happening.”

Probably without realising it, Mr Gore has effectively contradicted recent comments by WA’s new premier, Mark McGowan, about the state’s finances being the worst since the Great Depression, a comparison the premier meant to be confined to the government’s financial position but which was expanded by some commentators to include all facets of the state’s economy.

Powerful words such as ‘depression’ have a habit of sticking, and it might have reasonably been expected that Peet’s business would be a victim of investors ducking for cover. This has not happened, however, with the company’s share price rising rather than falling after the premier dropped his D-word bomb.

In the weeks after April 6, when Mr McGowan stunned the business community with his remark, Peet’s share price has risen by 7 per cent to a 12-month high of $1.25. Over the same time, the ASX all-ordinaries index has slipped 1 per cent.

It’s the improving outlook that has driven increased interest in Peet from a number of Australia’s shrewdest fund managers, including Ellerston Capital, Allan Gray Australia, and Challenger Financial.

What they see in Peet is a business with a record value of contracts in hand ($556 million), and strong earnings flowing from its eastern states property development activities with major exposure to WA, which is showing early signs of recovery.

“If WA normalises, which we’re confident it will over the next year or so, than we will see the state’s contribution to Peet’s earnings rise from its current low of around 10 per cent of pre-tax earnings,” Mr Gore said.

When times are good, and Peet’s management is on the ball, the company blossoms. It’s the opposite in tough times and when management goes to sleep at the wheel, which is what was happening before the current chairman and major shareholder, Tony Lennon, took charge in 1985.

Back then, Peet was widely seen as a business that had retreated into being little more than a suburban real estate agency, albeit one with a 90-year history of residential developments and very deep roots in the leafy western suburbs where most of Perth’s private money was held (and still is).

An experienced real estate agent before his move to take control of Peet, Mr Lennon timed his arrival to perfection, with WA enjoying one of its regular booms (built largely on debt and the sometimes dubious financial dealings of corporate entrepreneurs such as the late Alan Bond, Laurie Connell and Robert Holmes a Court).

In late 1987, two years into the rebuilding of Peet, the WA economy was rocked by the stock market crash, which devastated the reputations (and most of the fortunes) of the entrepreneurs, triggering a dark period capped by interminable government inquiries into what became known as WA Inc.

While companies crashed in domino fashion, wiping out big names such as Rothwells, Bell Group and Bond Corporation, Peet chugged along, sticking to its knitting as a residential property specialist, declining temptations to diversify.

Watching Peet’s progress is not a particularly public sport because the company has a tight share register, topped by Mr Lennon with his 19.4 per cent stake, and followed by Allen Gray with 10.5 per cent and then Ellerston with 7.92 per cent.

However, with its share price up 39 per cent from a three-year low of 88 cents in the middle of last year to its latest trades at $1.25, Peet ranks as one of WA’s top ASX-listed industrial companies with a market value of $595 million and a spot in the BN30 – a Business News list of stocks that reflect the overall WA economy.

Investment banks that follow Peet have a positive opinion of the company, though it is weakening after the strong share-price recovery since this time last year.

The banks’ consensus view is that the share price could get as high as $1.27. Macquarie tops the forecasts with a price tip of $1.40, based on Peet’s solid first-half profit reported earlier this year.

That result, for the six months to December 31, was dominated by revenue from land sales in Victoria and Queensland, with group income totaling $153 million, up 12 per cent on the previous corresponding half year, with pre-tax profit up 9 per cent to $44 million.

Peet closed the half year with a record 2,450 contracts in hand, and has reduced gearing (debt) from 28.8 per cent to 24.8 per cent.

Thanks to the downturn, WA was the weakest of Peet’s operating locations, but a potential change was noted in the half-year report.

“The WA market was at, or close to, a low point of the current cycle,” the company said.

The outlook was for tough conditions to last at least until June 30 and into the new financial year.

However, with an extensive land bank in WA, Peet is positioned to ride up with the state’s inevitable economic recovery, just as it did after the Great Depression, and the other downturns that have followed every resources sector crash.

It’s the history, and proven survivability of Peet, that explains why investment banks and smart investors have turned positive about the company. This, in turn, means they are becoming more positive about WA, because Peet’s performance is a forward indicator of where WA is heading.


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