Three stocks benefitting from property boom
Some friends are renovating their house. After putting the work off for years, they are redoing their kitchen and bathrooms, updating furniture, adding a pool and doing some landscaping.
Three factors drove their decision. First, money is cheap with the cash rate near zero. A $500,000 loan to fund the renovation requires a monthly repayment of $2,000 over 30 years.
Second, they have extra cash after cancelling an overseas holiday last year. With international travel off their agenda this year and next, there’s surplus money to put into their house.
Third, house prices are rising. With a chorus of media commentators tipping double-digit house gains, they feel confident to invest in their property and boost its value.
I suspect many homeowners will do the same in the next two years. Australia is on the cusp of an almighty property boom that will flow into renovations and home furnishings.
I can’t recall a better outlook for home-related stocks. Westpac this week predicted a 10% increase in Sydney dwellings in 2021 and a similar gain in 2022. Melbourne property prices will also rise 10% next year.
Never underestimate the wealth effect on home spending. Sydney’s median house price was a record $1.2 million in fourth-quarter 2020, Domain Group data shows. If Westpac is right, Sydney homeowners, on average, will feel $240,000 wealthier over the next two years.
The wealth gain, of course, is on paper. It’s also somewhat illusory; homeowners who sell for a higher price in a hot market inevitably pay more for their next property. But try telling that to some owners who watch their property value soar and have to spend some gains.
A rising share market is adding to the wealth effect. I expect a low double-digit total return from Australian shares this year. Shareowners who also own a property will feel like their wealth is being boosted from both ends, even though the gains make up for a few years of flat growth.
Then there are interest rates. Westpac believes rates won’t rise until later in 2022. With three-year fixed home loans as low as 1.75%, investors have at least a few years of ultra-cheap money. Again, this supports higher investment in established dwellings.
Government homeowner incentives during COVID-19 add further fuel to the fire. Not to mention Australians sitting on a $200-billion savings stockpile, partly due to COVID-19 handouts.
There’s also a “boredom” factor. After almost two tough years of COVID-19 (by the end of 2021), many people will be itching to treat themselves, finances permitting. A new car, motorcycle, couch, kitchen appliances or other homewares could be a much-needed tonic.
I’ve identified several home-related stocks in recent months, most recently Beacon Lighting Group (BLX) and Hipages Group Holdings (HPG). Both recently reported pleasing profit results and had encouraging outlook statements.
Here are 3 more home-related stocks to consider:
1. GWA Group (GWA)
After a disappointing few years, shares in the bathroom and kitchen products group finally rallied in late 2020 as optimism grew about the property recovery. GWA rose from $2.66 in November to a peak of $3.80 in February, but is back to $3.12 after its profit result.
GWA this month reported a 4.4% drop in revenue for the first half of FY21 compared to the same period a year ago, and a 12.2% fall in underlying earnings (EBITDA). Weaker construction conditions in the half, largely due to COVID-19, dented profitability.
GWA noted industry improvement in the second quarter of FY21 as more homes were built. The company’s order book for commercial clients is up 16% year-on-year. GWA said leading economic indicators pointed to higher home construction and renovations activity.
The market got too far ahead of itself when GWA rallied in late 2020. Equally, the reaction to GWA’s interim profit result looks overdone.
GWA is superbly leveraged to the housing cycle. More homes being built and higher spending in the renovations and replacement market mean rising demand for bathroom/kitchen products.
The company looks like it is at an inflexion point after a few lean years for shareholders. Don’t expect quick gains, but GWA is well placed to deliver steady returns over the next few years.
Chart 1: GWA Group (GWA)
2. Breville Group (BRG)
It’s easy to give up on Breville after its soaring gains. Shares in the kitchen-appliances star are up 11% this year and have almost tripled over two years to $28.80.
Some good judges think Breville is expensive. At its current price, it trades on a forecast Price-Earnings multiple of 36 times FY22 earnings, on Morningstar numbers. That’s high for a manufacturer. Morningstar values Breville at $18 a share.
With respect, the bears are wrong on Breville. For years, I argued that Breville was reinventing itself through innovation. The company was transforming from an Australian business that exported into a genuinely global company – and speeding up its innovation and product development/release cycle.
All too often, the market focuses on next year’s earnings rather than longer-term issues such as innovation and brand – issues that are hard for analysts to quantify. Or organisation culture: how did an Australian manufacturer become a global standout in appliance design?
Some analysts believe Breville’s recent gains are temporary: more people worldwide cooked at home during COVID-19 restrictions and upgraded kitchen appliances or bought new ones.
I believe Breville’s growth rate will remain elevated in the next few years as it expands to more markets and benefits from an international easing of COVID-19 restrictions. Just over half of Breville’s sales are now in the US and almost a quarter in Europe and the Middle East.
Like Australia, other key western markets should enjoy rising property prices when COVID-19 eases, amid record-low interest rates and hyper government stimulus. Breville will have consistent tailwinds in more markets – and consumers spending up on appliances.
Share-price gains will be slower from here and it wouldn’t surprise to see a larger short-term pullback or correction in Breville shares, given the extent of its rally. The market had high expectations and Breville delivered in its FY21 interim result with upgraded guidance.
Any sustained price weakness would be a long-term buying opportunity. Breville has emerged as one of Australia’s great companies and among the few mid-caps with a genuinely global footprint and ability to sell at premium prices in the cut-throat appliances market.
Sometimes it’s harder to stick with a stock that has soared – and let profits run – than buy a beaten-up company. But there was a lot to like about Breville’s recent result and commentary.
Chart 2: Breville (BRG)
3. Joyce Corporation (JYC)
Microcap investors should examine Joyce Corporation, owner of the Bedshed franchise network and KWB retail kitchen showrooms group. After being slaughtered at the height of the COVID-19 sell off in March 2020, Joyce has more than doubled to $2.
I emphasise that Joyce, a $56-million company, suits experienced investors who are comfortable with the benefits and risks of investing in thinly-traded microcaps.
I used to follow Joyce, but lost interest a few years ago. An unusual stock, Joyce had a grab-bag of businesses. Within that were good brands like Bedshed and potential in the kitchen market. The business has been streamlined, with the investment in the Lloyds online auctions operation the latest to go.
Joyce’s Bedshed Franchising business has 32 stores and KWB Group has 21 showrooms. Having built up its cash reserves during COVID-19, Joyce has extra funds to expand.
In October, Joyce announced Dan Madden as its new CEO. Having impaired the value of some assets during COVID-19 and divested the Lloyds business, Joyce looks like it is creating a run for Madden to add value through acquisitions and organic growth.
Bedshed has invested in its brand in recent years and built good recognition in the bedding market – not that you’d know it by Joyce’s market capitalisation. The stock has a low market profile and barely any brokers I know cover it. Joyce is badly under-researched.
Microcap investors should watch out for Joyce’s upcoming interim profit result. One can imagine more homeowners upgrading bedding and kitchens amid stronger renovations and home-building activity. If Joyce is ever going to become a larger company, it’s now.
Chart 3: Joyce Corporation (JYC)