Results Analysis
Whilst INA explains away the February downgrade to settlement guidance as being significantly influenced by weather and associated construction delays, a delay is a delay. The downgraded guidance implies a step change in the run-rate of settlements, and a 17% fall in FY23 earnings despite only ~4 months left of FY23.
1H23 showed INA’s LVR had risen from 26% to 31%. Whilst well below the covenant cap of 55%, gearing has increased. INA funding arrangements with Sun Communities (NYSE: SUI), who own 10.25% of INA expire in November 2023.
With five major projects underway today, the key question is whether Sun's current terms or commitment to more projects continues. The higher working capital and lower cash generation place additional pressure on the Sun renewal.
Long-term followers of the listed residential housing sector will recall the issues listed developer Gateway (GTY.AX) had in 2018 following delays in settlement volumes. Offshore interest proceeded with US property giant Hometown America purchasing GTY for $2.25 per share, or 30% below its peak share price, for $625m. The offer represented a 47% premium to NTA. INA currently trades at a 13% premium to NTA.
There have been several trade sales of land lease operators in recent years. Halcyon was purchased by Stockland Group (SGP.AX), GemLife a private owner and operated consolidated two assets into one in 2022, whilst media speculation continues to point to transactions involving Serenitas which is currently owned by private equity and GIC partners.
Investment View
Two downgrades to settlements guidance within 3 months, the CEO selling just over 10% of his holdings, and the prospect of further interest rate rises are likely to keep a handbrake on the INA share price over the next 12 months.
We have downgraded our rating from Buy to Hold.
A more negative stance on stock is not warranted given; a) the share price fall to date; and b) significant inherent long-term value in the INA assets could ultimately see corporate interest in INA.
Risks to Investment View
Lower-than-expected settlement growth or falling demand for retirement housing solutions would impact earnings growth. A sharp drop in residential housing markets would be detrimental to development margins.
A slowdown in holiday activity in the Parks business would weigh on earnings growth.
Corporate interest in INA is possible, and we note that M&A in the sector remains elevated. Sun Communities (NYSE: SUI), who own 10.25% of INA and provide operational assistance to INA would need to be closely involved in any potential INA M&A.
Recommendation
We have downgraded our recommendation from Buy to Hold.
Figure 1: INA is guiding to a rapid increase in settlements volumes into 2024/25*, driven by new projects releases
Figure 2: Earnings are expected to increase dramatically off the back of higher settlement volumes
Figure 2: Dividend yield is based on a 50% payout ratio
Figure 3: Price/NTA 1.05x, a discount to recent M&A multiples in the sector
