Why This Activist Investor Is Buying Fleetwood

Why This Activist Investor Is Buying Fleetwood

Source: Barron’s Asia.
By: Daniel Shane.

Shares in Australia’s Fleetwood Corporation ( FWD.AU ) have looked feeble since the Lucky Country’s commodities boom entered retirement. The maker of ‘dongas,’ or pop-up accommodation for remote mining sites, has seen its share price plunge from over AUD13 in mid-2012 to as low as AUD1 earlier this year.

But the Perth-based company isn’t ready for the scrap-heap just yet, though. Fleetwood is changing tack from mining to retiring as it hopes to capitalize on Australia’s ageing population, or the so-called ‘gray boom.’ Could it be the stuff of dreams for investors? One of the country’s seasoned activist investors hopes so.

Sydney’s Sandon Capital, an activist investor that manages AUD60 million, this month picked up a 4.5% stake in ASX-listed Fleetwood. The fund thinks the firm is undervalued by the market, but turning Fleetwood around could be a long and winding road.

Gabriel Radzyminski, Sandon’s founder, points to a balance sheet he thinks is bloated. He says over the years Fleetwood’s become weighed down by underperforming businesses like caravans. In just over a decade, the company’s blown through AUD355 million on capex, during which time earnings have more than halved to a piddling AUD3.9 million in 2015. Fleetwood’s forecast to post a loss this fiscal year, but could swing back into the black in 2017.

Sandon accepts Fleetwood needs significant work under the hood to unlock its value. Fleetwood’s current market cap is nearly AUD130 million, or about half what the company’s assets are worth. The crux of Sandon’s case is that Fleetwood needs to ditch its caravan business, which is losing about AUD10 million annually amid failed efforts to get it back on track for three years. “This would immediately result in a significant uplift to earnings,” believes Radzyminski. Fleetwood could also use any proceeds to buy back shares or start paying dividends again, which’ve dried up over the last couple of years. First up, it needs to find a buyer though.

Sandon also argued that Fleetwood needed to sort out its accommodation business in Western Australia. It’s understandably been one of the company’s worst performing units since the mining boom turned to dust. Fleetwood is making efforts to turn the business around: In June it struck a five-year deal to supply affordable housing to a company called National Lifestyle Villages. Fleetwood’s shares jumped on the news. It was also enough for Hartleys’ Simon Andrew, the one lonely analyst who covers the stock, to upgrade Fleetwood from Neutral to Buy. His target price for the stock is AUD2.19, just 5% higher than the shares’ recent price. What could lead to further upgrades? “The remaining challenge for management is to narrow the losses from the caravans business,” he says.

The big opportunity for Fleetwood is in so-called “affordable living solutions,” or quick and cheap housing. In Australia property prices are rising faster than people’s income, so there’s demand for this kind of budget housing for low-earners or those on a fixed-income, such as retirees. In the U.S., where many families still feel the effects of 2008’s foreclosure crisis, these kinds of ‘manufactured homes’ make up more than a tenth of new residential properties. In Australia, the proportion’s much smaller but has lots of potential to grow. Demographic trends and policy also point in Fleetwood’s favor: Australia’s population is ageing which creates demand for retirement homes, which have also been a target for government subsidies and assistance.

So can Sandon lay the foundations for a transformation at Fleetwood? Its recent track record suggests so. Last year Sandon engaged with BlueScope Steel ( BSL.AU ), arguing the Melbourne firm was the world’s cheapest steel-maker. Sandon urged BlueScope to offload its more peripheral assets and cut operating costs, which the company’s been busy doing. The stock’s up about 80% since. That’ll be music to the ears of anyone holding Fleetwood’s stock.

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