by
Justin McCarthy | Sep 02, 2014
Key points
1. FY14 NPAT of $1.6m was in line with expectations ( $19.0m in FY13)
2. The East Village residential apartments are now expected to be completed and settled by the end of September 2014, only one month later than initially planned. It is 100% pre-sold and given the current strength of the Sydney apartment market all units are expected to settle
3. The Payce 9.5% fixed rate bond is currently offered at an indicative yield to maturity of 7.49% (or a credit spread of circa +441bp) ranking it amongst the highest yielding bonds in the AUD market
Payce Consolidated Limited (Payce) has released its FY14 consolidated group results to 30 June 2014. The full report is available at the following link.
The results were broadly in line with expectations.
As written in the November 2013 research report when the Payce 9.5% bond was launched, “due to the nature of property development, profit numbers (and cashflow) are very volatile with income only recognised...when the development has finished and properties are sold.”
With no developments being completed or settled in FY14, as planned, there was little to take from the profit and loss and cashflow reports for FY14. It is expected that the East Village development, which has 206 residential units plus residential and commercial space, and the Platinum project, with 322 residential units, will both be completed and settled in the half year to 31 December 2014. The resultant revenue and profit will be booked in that period.
The progress of the East Village project and the completion and refinance of the retail / commercial space is of particular importance to investors. This will provide a guarantee to bondholders which will rank behind the senior secured bank facility.
In the November 2013 research report we wrote “East Village is currently Payce’s largest project with 206 residential apartments (100% pre-sold) and 33,000 sqm of retail / commercial space (75% pre-leased, including 20 year leases to Coles, Virgin Active and Audi). Total project value is $336m including $126m in residential sales and $210m for the retail / commercial space...The initial security position will be significantly improved when a corporate guarantee from the owner of the flagship East Village project is obtained upon its completion and debt refinance. This is expected in August 2014 but must be provided by 15 February 2015.”
The East Village residential apartments are now expected to be completed and settled by the end of September 2014, only one month later than initially planned. It is 100% pre-sold and given the current strength of the Sydney apartment market all units are expected to settle.
The East Village retail / commercial space is now near fully-leased. Construction of the retail area is being finalised and it is anticipated to open to the public early in the October - December 2014 quarter, with refinance expected to be completed and the guarantee provided shortly thereafter.
Key figures from the FY14 group results included:
- Net profit after tax $1.6m (FY13 $19.0m)
- Revenue $57.0m (FY13 $152.2m) relating to rental income received and proceeds from the sale of land into joint operations
- Total assets $527.2m (FY13 $217.5m)
- Total debt $355.2m (FY13 $62.4m)
- Total liabilities $393.6m (FY13 $81.9m)
- Total equity $133.6m (FY13 $135.6m)
- Total dividend paid for the year $3.0m (FY13 $3.0m)
While the revenue and profit numbers differ from the forecast results for FY14 as published on page 7 of the November 2013 research report (based on Wellington Capital analyst forecasts), this differential is not considered material given the timing issues detailed above and the expectation of the very large revenue and profit contribution from the completion of the Platinum and East Village projects in the next six months.
The balance sheet figures, including sizeable increases in assets, debt and liabilities are roughly in line with forecast, albeit slightly lower, as Payce has increased development activities, including a sizeable development in West End (Brisbane) in joint operation with Sekisui House. The site was acquired for $45m in May 2014 and once completed is expected to have more than 1,000 residential units as well as a retail precinct.
Subsequent to year end, Payce has announced the sale of the Hurstville development site for $43m, in which the Group has a 75% interest, with settlement expected to occur in October 2014. The sale is expected to result in a material profit.
The company has also recently announced the acquisition of 2 industrial lots located in Auburn (Sydney) for $50m with settlement expected in 1Q15.
Overall the FY14 results and East Village progress update are broadly in line with expectations. With East Village all but completed the construction risk that bondholders are exposed to has reduced somewhat.
The key remaining risk is completion and refinance of the East Village retail / commercial space and the provision of guarantee from the subsidiary that will hold those rental assets. This guarantee once in place will move bondholders to a lower risk profile with the backing of the retail /commercial assets (less any secured bank debt which is limited to a maximum loan-to-value (LVR) ratio of 70% until December 2016 and 60% thereafter), providing significant residual value to support the guarantee.
The Payce 9.5% fixed rate bond is currently offered at an indicative yield to maturity of 7.49% (or a credit spread of circa +441bp) ranking it amongst the highest yielding bonds in the AUD market. It matures on 3 December 2018, but is callable on 3 December 2016 at $102 or 3 December 2017 at $101.
Further reduction in the credit spread would be expected if/when the guarantee detailed above is put in place.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. The Payce bonds mentioned in this article are available to wholesale investors only.
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