A value proposition - BUY

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1 Initiating coverage 16 October 215 AVJENNINGS (AVJ) A value proposition - BUY We initiate coverage of AVJennings with a BUY recommendation and a price target of 63 per share. AVJennings is an Australian residential real estate developer with a land bank of over 1, lots and selling 1,8 to 2, lots per year. AVJennings trades on a hefty 38% discount to NTA (88 /sh), one of the largest discounts amongst the competitive set. We believe the NTA discount to be excessive, failing to capture the business ability to deliver approximately 2, lots pa at a gross profit margin of 2-25%. That said, real estate development remains a cyclical business and our valuation reflects this uncertainty. Key points Business overview: AVJennings is a real estate developer, building quality, value for money, master-planned communities and urban renewal sites in Australia and New Zealand. AVJennings competes in three key areas; 1) land development, 2) integrated housing and 3) apartment construction (but not high-rise residential apartment towers). Investment thesis: AVJennings is about volume more than price. We believe that the AVJ stock price is factoring in a sales price decline of 7.5% in FY16, nil growth in FY17 and a permanent 25bps compression in the gross profit margin to ~22.5% - a scenario we see, on balance, as unlikely at the affordable end of the spectrum. Even in the event of housing price declines, in the long term AVJ has the ability to reduce work in progress / site acquisitions, subsequently improving sales rates and retaining cash. AVJ controls 1,198 lots throughout Australia, with 1,512 lots under construction (work in progress). With the stock trading at a 38% discount to NTA, we see upside from a progressive sell down of the land bank, realising the NTA and generating cashflow for the payment of dividends and reinvestment into new projects. Forecasts: We forecast an FY16 free cashflow yield of 18.5%, with the FCF yield to fluctuate with the level of site acquisitions. We have factored in FY16-18 acquisitions of $9m pa and $1m pa (indexed) thereafter. We expect that AVJ will maintain the land bank at 5-6 years of supply into the future. Valuation: Our 12-month target of $.63/sh is based on the average of our FY16 EV/EBITDA (6.2x, $.59/sh), FY16 PER (7.7x, $.71/sh), Dividend yield (FY16 6.6%, $.62/sh) and DCF (12.3% WACC, $.61/sh) valuations. Risks and catalysts Risks include potential for excessive debt funded site acquisitions, declining average sales values, declining sales rates or deteriorating margins. Catalysts include increased contract / settlement volumes, increased average lot prices and improved housing market fundamentals within the various geographies. Year-end June (AUD) FY14A FY15A FY16F FY17F FY18F NPAT rep ($m) NPAT norm ($m) Consensus NPAT ($m) EPS norm (cps) EPS growth (%) P/E norm (x) EV/EBITDA (x) FCF yield (%) DPS (cps) Dividend yield (%) Franking (%) Source: Company data, WHTM estimates, S&P Capital IQ 12-mth target price (AUD) $.63 Share 15-Oct-15 (AUD) $.54 Forecast 12-mth capital return 16.7% Forecast 12-mth dividend yield 7.5% 12-mth total shareholder return 24.1% Market cap $28m Enterprise value $297m Shares on issue 384m Sold short. ASX 3 weight.% Median turnover/day Liam Schofield, CFA liam.schofield@wilsonhtm.com.au Tel $ mth share price performance $.m.4 Oct-14 Feb-15 Jun-15 Oct-15 1-mth 6-mth 12-mth Abs return (%) Rel return (%) KEY CHANGES Before After Var % NPAT: FY16F 35.2 norm FY17F 36.5 ($m) FY18F 34.1 EPS: FY16F 9.3 norm FY17F 9.6 (cps) FY18F 8.9 DPS: FY16F 4.1 (cps) FY17F 4.3 FY18F 3.8 Price target:.63 Rating: AVJ XSI Rebased BUY Wilson HTM Equities Research Issued by Wilson HTM Ltd (Wilson HTM) ABN Australian Financial Services Licence No , a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

2 PRICE TARGET DCF EV/EBITDA 6.25x.59 PER 7.7x.71 Divid Yield Valuation.63 Enterprise Value Net Debt 88.9 Equity Value 24. Shares on issue 38.9 Valuation.63 Prem. Disc 16.7 Dividend Yield 7.6 TSR 24.3 KEY ASSUMPTIONS Year-end June (AUD) FY13A FY14A FY15A FY16F FY17F FY18F FY19F FY2F Land bank (lots) 9,952 9,219 1,189 1,139 1,135 1,184 1,419 1,67 Lots sold (lots) 819 1,415 1,737 1,839 1,797 1,778 1,813 1,854 Lots settled (lots) 829 1,254 1,538 1,85 1,839 1,797 1,778 1,813 Contracted (A$m) Settled (A$m) ASP ($/dwelling) Management income (A$m) Sales Management revenue Other revenue Total Revenue INTERIMS ($m) Half-year (AUD) Dec 14 Jun 15 Dec 15 Jun 16 1HA 2HA 1HE 2HE Sales revenue EBITDA EBIT Net profit Norm EPS EBIT/sales (%) Dividend (c) Franking (%) FINANCIAL STABILITY Year-end June (AUD) FY15A FY16F FY17F Net debt Net debt/equity (%) Net debt/ev (%) Current ratio (x) Interest cover (x) Adj cash int cover (x) Debt/cash flow (x) < Net debt (cash)/share ($) NTA/share ($) Book value/share ($) Payout ratio (%) Adj payout ratio (%) < EPS RECONCILIATION ($m) FY15A FY16F Rep Norm Rep Norm Sales revenue EBIT Net profit Notional earn.... Pref/conv div.... Profit for EPS Diluted shrs (m) Diluted EPS (c) RETURNS FY15A FY16F FY17F FY18F ROE (%) ROIC (%) Incremental ROE Incremental ROIC PROFIT AND LOSS ($m) Year-end June (AUD) FY13A FY14A FY15A FY16F FY17F FY18F FY19F FY2F Sales revenue EBITDA Depn & amort EBIT Net interest expense Tax Minorities/pref divs Equity accounted NPAT Net profit (pre-sig items) Abns/exts/signif Reported net profit CASH FLOW ($m) Year-end June (AUD) FY13A FY14A FY15A FY16F FY17F FY18F FY19F FY2F EBITDA Interest & tax Working cap/other Operating cash flow Maintenance capex Free cash flow Dividends paid Growth capex Invest/disposals Other inv flows Cash flow pre-financing Funded by equity Funded by debt Funded by cash BALANCE SHEET SUMMARY ($m) Year-end June (AUD) FY13A FY14A FY15A FY16F FY17F FY18F FY19F FY2F Cash Current receivables Current inventories Net PPE Investments Intangibles/capitalised Other Total assets Current payables Total debt Other liabilities Total liabilities Minorities/convertibles Shareholder equity Total funds employed Wilson HTM Equities Research 2

3 Contents page Executive summary... 4 Looking at the potential... 5 Investing scorecard... 6 Business model analysis... 7 Earnings forecasts... 8 Valuation Sector overview Business overview Appendix A: Board, management and substantials... 3 Appendix B: Project pipeline at 3 June (AVJ) Disclosures and disclaimers Wilson HTM Equities Research 3

4 Executive summary Recommendation and share price target We initiate coverage with a BUY recommendation and a 12 month price target of $.63/sh, implying a total return of 24%. Business overview AVJennings is a developer of quality, value for money, master-planned communities and urban renewal sites in Australia and New Zealand. AVJennings competes in three key areas; a) land development, b) integrated housing and c) apartment construction (not high-rise residential apartment towers). AVJ controls 1,198 lots throughout Australia. This land bank represents future cashflow which will be realised as the company sells completed lots and either pays out dividends or reinvests in new projects. Key reasons to BUY Realising cashflow from the undervalued land bank: The current NTA of 88 /sh comprises mostly land and work in progress. We believe the current P/NTA discount is excessive. On the basis of a gradual sell-down of the existing land bank, we believe cash realisation of ~$1.1/sh could be achieved by FY2 (see Chart 12 Pg12). That said we forecast the majority of this cashflow will be either paid out in dividends or reinvested into new projects. Valuation: AVJennings screens cheap when compared to the competitive set on a range of metrics, notably 1) P/NTA (AVJ is a 38% discount to NTA vs 11% for the average of the competitive set), 2) EV/EBITDA (cheapest at 5.9x), PE ratio (cheapest at 5.8x) and dividend yield (second best at a FY16 dividend of 7.6%). Chart 1: Price to net tangible asset (NTA) comparison P/NTA (x) x.99x.81x AVJennings is currently trading at a 38% discount to its current NTA of 88cps..62x.41x.2. Source: Wilson HTM Bull and bear case indicates asymmetry to the upside: AVJennings does not require run-away house price growth to create value, merely the orderly sell down of the existing land bank and the judicious acquisition of new projects. Our bull case valuation, based on a 5% increase to property prices in FY16-17, is $.87/sh. Our bear case valuation, based on a 1% decline in FY16, is $.43/sh (refer to pg 5 for more details). Key risks VLW PPC SDG AVJ DVN Acquisitions: AVJennings has significant debt capacity with A$123m undrawn Australian senior secured debt, plus an undrawn S$5m Medium Term Note facility. This level of debt capacity is an opportunity, but also potentially a risk. Residential housing market: Residential real estate markets are challenging to forecast, with markets impacted by a confluence of factors, including interest rates, land supply, taxation and economic growth. Given that real estate is impacted by local factors, the major Australian markets are at differing points in the cycle. Wilson HTM Equities Research 4

5 Looking at the potential Sensitivity analysis We have undertaken a sensitivity analysis looking at a range of potential outcomes: Bear case: 1% drop in sale prices in FY16, a 2.5% decline in FY17 and then reverting to inflation growth (+2.5%) thereafter, plus slower sales rates across all projects and a lower gross profit margin (22.5%, not 25%). Base case: We have adopted an average FY16 selling price of $199,/lot (excl GST) (FY15: $2,). We have then applied the company s projected development timings, along with a 25% gross profit margin. Bull case*: 5% increase to average selling prices in FY16 and FY17 (CPI thereafter), increasing sales rates across all projects, and retaining a 25% gross profit margin. Chart 2: Scenario analysis A$/sh 1..9 $.87/sh.8.7 $.63/sh $.47/sh $.54/sh.2.1. Valuation Share price Bear case Valuation Bull case Source: Wilson HTM * Note: AVJennings does not disclose project level revenue estimates for remaining stock. However, in their May-15 presentation management detailed the total Gross Development Value (GDV) per project, being the value since project commencement. We have reconciled the project level GDV estimates with the FY15 average selling price of $2,/lot (excl GST) across the portfolio. Wilson HTM Equities Research 5

6 Investing scorecard Earnings growth Our view: Our principal investment case for AVJennings centres around the progressive sell down of the existing land bank (1,198 lots) and the acquisition of new projects - retaining the land bank at 5-6 years of supply. The investment case is principally about buying the stock at a 38% discount to NTA then realising both the NTA (88 /sh) and the margin on the development (25% GP). The existing land bank should generate cash of $1.1/sh by FY2. That said, the majority of the surplus cashflow that is not paid out in dividends will be reinvested in new projects, slowing any cash build up. Our view: Given that AVJennings is a residential home builder it is invariably tied to the vagaries of the residential housing cycle. Whilst AVJennings has historically been able to retain gross profit margins at 2-25% (excluding write downs), any decline in the housing market has the potential to magnify shareholder losses. Upside / Downside Upside: Under our bull case we assume that all markets continue to grow at ~5% in FY15-16 and gross profit margins remain at ~25% - this generates a valuation of $.87/sh. Downside: Under our bear case we assume that prices decline 1% across the board in FY16, then decline a further 2.5% in FY17, in addition to a permanent GP margin decline of 2.5% to 22.5% - this generates a valuation of $.47/sh. Industry structure Our view: Real estate development is generally described as having 'low barriers to entry', outside of the capital requirements. That said, AVJennings is a well known brand within the Australian residential real estate market, this offers a degree of 'quality assurance' to purchasers. Residential dwelling construction and residential community development is notoriously cyclical. A key risk across the sector remains timing, be it the timing of site acquisitions or timing of project releases. Thematic Real estate remains a localised business and as such each geography within the AVJennings portfolio of projects needs to be considered on its own merits. From a macro view, we see increasing doubts around the longevity of the current cycle (ie Sydney and Melb. appear to be slowing). Speculation continues to point to some improvement in SE Queensland. Management Substantial ownership: 5.3% of AVJennings is owned by SC Global Developments Ltd. Board configuration: Simon Cheong, the Chairman of AVJennings, also serves as Chairman and Chief Executive Officer of SC Global Developments Pte Ltd. Of the eight person board, five reside in Singapore. Environmental Risk: Changes in climatic conditions affecting the company s business activities (including adverse weather conditions), soil and water contamination or runoff from project land and the presence of previously unidentified threatened flora and fauna species on project land (which may influence the amount of land available for development) are some of the risks. ESG Workplace Health and Safety Risks: Accidents at work sites resulting in claims and penalties are potential risks the company faces in this area. Regulatory Risk: The company s operations span five states in Australia and New Zealand. Legislation and regulations governing the company s activities vary in each state. The company is dependent on various state regulatory bodies and councils granting the requisite licenses and approvals required for it to carry on its business. Source: Wilson HTM Wilson HTM Equities Research 6

7 Business model analysis Key Partnerships Key Activities Value Proposition Customer Relation Customer Segments Supplier and subcontractor relationships are critical for completing projects on time, on budget and on spec. Government and town planning relationships assist in the timely receipt of development approvals Land owners - AVJ acquires englobo land parcels and also enters into JV / Development Agreements with land owners. Land owner relationships allow AVJ to continue restocking the land bank Financial institutions - AVJ has Australian and offshore finance arrangements Other industry relationships include a range of professions including solicitors, accountants, valuers etc Cost Structure AVJennings competes in three key areas: a) land development, b) integrated housing and c) apartment construction (not high-rise towers) Key resources Land bank - AVJ controls 1,198 lots throughout Aust and NZ. This land represents future cashflow which will be realised as AVJ sells lots Work in progress - AVJ currently has 1,512 lots under construction AVJ has a well established brand within the residential housing market Available debt: Aust. multioption club debt facility, plus a multicurrency MTN programme AVJennings is a leading developer of high quality, value for money, master-planned communities and urban renewal sites in Australia and New Zealand Focus is on the deepest part of the market, which requires strong emphasis on the supply of quality affordable product. Attractive, high quality, affordable housing The company aims for the AVJennings brand to stand for trust, reliability, value and quality Revenue streams Customers continue to value the brand and what it stands for. Channels Project sites sales offices Project websites Third party agents Limited use of marketing agents in QLD Repeat purchasers Retail Customers: % first homebuyers % domestic investors - 5-6% trade-ups/ downsizers - 1% Foreign domiciled buyers B2B business: other builders buy our land Average gross margins are reasonably steady throughout the cycle (low high 2% depending upon product mix) the recent past has seen margins impacted by asset write downs Corporate administration costs are mostly fixed, with corporate overhead efficiency improving as revenue rises Variable costs largely tied to production/ revenue Source: Wilson HTM AVJennings is a pure residential developer The AVJennings business model is more volume driven, than price driven The business develops individual residential lots (dwellings) entirely on land which is owned or controlled by the company AVJennings predominately undertakes staged horizontal development rather than high rise The business has an internal building capability (ie construction teams to undertake projects in-house) Wilson HTM Equities Research 7

8 Earnings forecasts Contracts: We have adopted FY16 contract signings of 1,839 lots, falling toward the bottom of the company s FY16 guidance range of 1,8-2, contract signings, but above FY15 contract signings of 1,737 lots. Our forecast contracts are based on the company s project timing GANTT chart, outlined in the FY15 result presentation. Beyond FY16 we have adopted volume growth (contracts) which are 12 months delayed from price growth (ie prices growth of 5%, should translate into 5% volumes grow the following year). Settlements: We forecast FY16 lot settlements of 1,85, based on A) the FY15 WIP of 1,512 lots, B) the 1,737 lots contracted during FY15 and C) a number of forecast additional contracts to occur during the next financial year (FY16). Our forecast FY16 settlements of 1,85 lots represent a 2% increase on the 1,538 settlements which occurred in FY15. Given that today s contracts are tomorrow s settlements, we have adopted a twelve month delay on settlement post contract. This reflects a six to seven month timeframe for land development and seven to eight month home construction phase (refer Chart 1). Table 1: Forecast contract signings and settlements FY13a Land bank (lots) 9,952 9,219 1,189 1,139 1,135 1,184 1,419 1,67 Lots sold (lots) 819 1,415 1,737 1,839 1,797 1,778 1,813 1,854 Lots settled (lots) 829 1,254 1,538 1,85 1,839 1,797 1,778 1,813 WIP + Completion units (lots) 1,29 1,967 2,624 1,293 1, WIP + Completion units (A$m) Contracted (A$m) Settled (A$m) Ave. sale price ($,/lot) Management income (A$m) Source: Wilson HTM, company data Chart 3: Forecast settlements Lots 2,5 Future site acquisitions WA Settlements NZ Settlements SA Settlements QLD Settlements VIC Settlements 2, 1,5 1, Chart 4: Land bank forecasts Lots 12, 11, 1, 9, 8, 7, 5 6, Land bank (lots) FY8a FY9a FY1a FY11a FY12a FY13a FY14a FY15a FY16f FY17f FY18f FY19f FY2f 5, FY14a FY15a FY16f FY17f FY18f FY19f FY2f Lot prices: The average lot price achieved across the portfolio in FY15 was $2,/lot (excl GST). We have adopted this price as our baseline value per dwelling, after which we forecast value changes on a state-by-state basis. The state level growth assumptions reflect our view on the current residential market within each state and broadly correlate with Herron Todd White s National Residential Property Clock. Table 2: Residential real estate price growth assumptions Queensland 3.% 2.5%.% -2.5%.% New South Wales -2.5% -5.% -2.5% 2.5% 2.5% Victoria -2.% -4.% -1.5% 2.5% 2.5% South Australia -5.% -2.5%.% 2.5% 2.5% New Zealand.% -2.5%.% 2.5% 2.5% West Australia -2.5% -2.5%.% 2.5% 2.5% Ave. national growth (Acquisitions).% -2.5%.% 2.5% 2.5% Portfolio weight growth -.6% -2.3% -1.% 2.% 2.3% Wilson HTM Equities Research 8

9 Work in progress: AVJennings had 1,512 lots under development as at Jun-15. This represents those lots where construction has commenced, but not yet settled. The level of work in progress is impacted by the product mix (ie land sales have quicker turnover) and the purchaser type (builder sales may be multiple lots sold in one line). Land bank sales: AVJennings controlled 1,198 lots as at Jun-15. These lots are within a range of projects across land developments, integrated communities and apartments. AVJennings holds a range of interests in these projects from 1% ownership, through joint venture agreements to development agreements (ie contracted to develop the site). Whilst we account for the lots on a 1% basis, we consider revenue on an equity accounted basis. More importantly, land banking is only profitable where the market price of land is rising faster than the cost of capital. New site acquisitions: Given that AVJennings is a going concern, it is expected that the company will continue to purchase sites to replenish its stock of inventory (ie retain the land bank at 5-6 years of supply). We have made the assumption that AVJennings will acquire ~$1m pa of projects in FY16-18 and $12m pa (indexed) thereafter. Revenue recognition AVJennings does not disclose project level revenue estimates for the remaining stock in its existing developments. However, in their May-15 presentation management detailed the total Gross Development Value (GDV) per project (being the value since project commencement). We have reconciled the project level GDV estimates with the FY15 average selling price of $2,/lot (excl GST) across the portfolio. On this basis, we have adopted an average FY16 selling price of $199,/lot (excl GST). In terms of our forecasts, we have recognised revenue upon the settlement of the completed lots (dwellings). On this basis, revenue recognition occurs at the same time for both the profit and loss and the cashflow statement. Chart 5: Contracts vs settlements A$m Contracted (A$m) Settled (A$m) Management income (A$m) Chart 6: Forecast contract settlement revenue A$m Sales growth (%) % 7% 6% 5% 4% 3% 2% 1% % -1% Cost of goods sold Cost of development: The costs incurred by any developer include the land component and the construction component. In the case of AVJennings the majority of sales are recognised on settlement, the exception being some builder sales (approx. 5% of sales). This means that upon settlement the company recognises the capitalised land value spent to date (ie lot costs plus accrued interest), plus the cost of construction. On a cashflow basis the land cost is incurred in a prior period. As such, those lots sold from the land bank do not incur a cash cost in the settlement period, but rather reduce the existing land bank. The cost to construct is incurred over the seven to nine months prior to settlement. We have made the assumption that capitalised land costs represent approximately 25% of the realised sale price (excl GST), with the construction component equal to approximately 5% of the settlement (excl GST). The cost of the land comprises the purchase price, plus any capitalised interest prior to settlement. Wilson HTM Equities Research 9

10 The critical point for us is that AVJennings is a cashflow-based business with significant time lags between site purchase and settlement. By this we mean, AVJennings buys the land, develops the land, contracts the sale, builds the dwelling and then settles the contract for sale. This process necessitates substantial upfront cost, with revenues and costs only recognised in the profit and loss statement upon settlement of the lot. Refer to pages for our cashflow reconciliation. Management describe the business as volume driven, not price driven. Average gross margins are forecast by management to remain reasonably steady throughout the cycle (low high 2% depending upon product mix). These variable costs are largely tied to production/ revenue. This said there have been a number of instances were site values have been written down, impacting the effective reported margins (ie we have considered the asset write-downs as abnormal and unlikely to recur). Chart 7: Lot settlements drive both the P&L and cashflow Lots 2, 1,8 1,6 1,4 1,2 1, 8 6 Chart 8: GP Const. costs + land value + interest A$m % 3% 25% 2% 15% 1% 4 2 Lots settled (lots) 2 1 Gross Profit margin (%) 5% % Operating expenses Salaries and employee benefits reflect head office charges and should remain relatively flat. Given the mismatch between accounting earnings and cashflow, we have made the assumption that head office charges will modestly fluctuate with movement in settlements. These costs include commissions paid to internal sales staff. Selling and marketing expenses are significant cost items in the sale of real estate developments. We have assumed that whilst the majority of true marketing cost (ie advertising) will be spent prior to contract, the majority of external agents commissions will be paid upon settlement. Corporate administration costs are mostly fixed, with overhead efficiency improving as revenue rises. Total operating expenses are expected to remain relatively consistent, based on a stable rate of sale. That said, we forecast some modest fluctuations in operating expenses, a result of changes in settlement volumes through time. Table 3: Operating expenses Salaries and employee benefits expense Selling and marketing Other operating expenses Operating expenses margin (%) 14% 13% 13% 13% 13% 13% 13% growth (%) % 2% 15% -2% -4% % 4% EBITDA margin (%) 9% 15% 14% 14% 14% 13% 13% growth (%) % 12% 13% 3% -7% -5% 4% Wilson HTM Equities Research 1

11 Chart 9: Operating expenses % of total sales 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 8.8% Cashflow analysis Our cashflow forecasts for AVJennings are based on the company s project pipeline, with average selling prices and sales rates reflecting the company s forecast project end dates (refer to Appendix B for the current project pipeline schedule). In terms of cashflow timings, we have assumed dwelling contracts occur broadly inline with company forecasts. We estimate that average dwelling construction will span two accounting periods (ie a dwelling which is contracted in 1HFY16 will settle in 2HFY16). We have staggered the construction spend to be 5% within the first period and 5% in the second accounting period. Chart 1: Typical development cycle 14.% 13.5% 14.2% 13.8% 13.2% 13.2% EBITDA margin Other operating expenses Selling and marketing Salaries and employee benefits expense COGS Source: Company data In forecasting the movement in inventory (land bank) we have made the assumption that a) the business will spend ~$9-1m pa on site acquisitions and b) any site acquisition has a twelve month lead-time before construction starts. In the case of the land bank, we have assumed that land purchases and interest charges will pass through operating cashflows, not investing cashflows. Wilson HTM Equities Research 11

12 Table 4: Cashflow analysis Receipts from customers Payments to suppliers Other Cashflows from operations Cashflows from investing Cashflows from financing Chg in cash Cash close Chart 11: Cashflow analysis A$m Cashflows from operations Cashflows from financing Cashflows from investing Chg in cash Chart 12: Cash generation (excluding new site acquisitions) cps NTA per share (Net debt) / Net Cash per share -2 Share price -4 Cash conversion Historic years show negligible net cashflow generation, principally because the majority of surplus cashflow (excluding dividends) is directed to new project investments which are channelled through cashflows from operations (ie the company spends surplus capital on sites). Our forecasts are based on the sell down of the land bank with site purchases (reinvestment) of ~$9m pa in FY16-18 and $1m pa thereafter. We have assumed an acquisition rate of ~$5,/lot (indexed), representing 25% of the gross sale value (ex GST). Chart 13: Historic cashflow has been weak can this be reversed? A$m 5 % 2% % 1% 5% % Free cashflow from operations excludes dividends -1-2 Cashflows from operations Free cashflow yield -5% -1% Wilson HTM Equities Research 12

13 Balance sheet analysis Our valuation aims to forecast the progressive sale of existing freehold land, which currently forms part of inventory. This process is essentially the approval of the vacant englobo land, developing the lots, contracting the sale of individual lots, dwelling construction, and then the subsequent settlement. Given that AVJennings currently trades at a 38% discount to NTA, the market appears to be discounting both the value of the land and management s capacity to realise value through time. Chart 14: Cash conversion forecasts Chart 15: NTA growth A$m 7 A$m 5 A$/sh Cash and cash equivs Total inventories Total borrowings NTA NTA per share We forecast site acquisitions of $9m in FY16-18 and then $1m pa (indexed) thereafter. The acquisitions reflect ~$5,/lot (indexed), representing 25% of the completed product sale price (ex GST). Chart 16: Future site acquisition assumptions Dev. site purchase price Lots purchase 1,8 1,834 1,846 2,13 2,1 ASP ($/dwelling) Land cost (per lots) Chart 17: Net working capital A$m 6 Net working capital Net cash The cash conversion from the existing land bank will be offset by future site acquisitions -2 Wilson HTM Equities Research 13

14 Chg in reporting year 16 October 215 Profitability and return on assets Profitability: The profitability metrics are forecast to be relatively stable. We have made the assumption that land plus construction costs are equal to 75% of the sale price (excl GST). We would however note that if sales were too slow, the level of capitalised interest would build up and impact profits in the later years. Capital returns: Our model is based upon the premise that AVJennings will continue to spend surplus free cashflow (ex-dividends) acquiring development sites. Chart 18: (ASX:AVJ) - Return on Equity % (FY) (%) 35% 3% 25% 2% 15% During FY11-12 the company intentionally slowed production and reduced WIP in order to retain cash, preferring to wait for markets to improve. 1% 5% % -5% -1% The negative / low RoE's are often driven by asset writedowns (ie paying too much for sites in the good times) - this is the #1 risk for any real estate developer -15% FY215 FY214 FY213 FY212 FY211 FY21 FY29 FY28 FY27 FY26 FY25 FY24 FY23 FY22 FY21 FY2 FY1999 FY1998 FY1997 FY1996 Source: Capital IQ Chart 19: Profit and loss margins % of revenue 16% 14% 12% 1% 8% Chart 2: Balance sheet return metrics % 12% 1% 8% 6% 6% 4% 2% % EBITDA EBIT NPAT (Normalised) NPAT (Reported) 4% 2% % RoA ROIC RoE Source: Wilson HTM Source: Wilson HTM Wilson HTM Equities Research 14

15 Chart 21: Historic P/NTA time series P/NTA % -1% -2% -3% -4% CPS Whilst the P/NTA discount has always been significant for AVJ, it is reducing. -5% -6% -7% -8% P/NTA (LHS) Ave. P/NTA Discount (LHS) NTA (RHS) Share price (RHS) FY8a FY9a FY1a FY11a FY12a FY13a FY14a FY15a Current 4 2 Source: Capital IQ Financing Gearing (net debt/ total assets) is relatively low at 13.6% (total net debt $88.9 million) $25 million multi-option Club debt facility approved - Four banks provide corporate funding. Key features of the agreement include: No presales requirement prior to commencing horizontal development Come and go basis - few conditions precedent to drawdown (subject to covenant compliance) Evergreen tenor current termination date 3 September 217 but extended for 12 months at each annual review (19th year of operation) Available debt capacity (undrawn) is $123m ($127m drawn) Multicurrency MTN Programme established in Singapore (SGD5 million) - No notes issued as yet - Provides ready access to international term debt capital markets Firepower to pursue major direct property acquisitions and suitable corporate combinations Table 5: Debt position Current interest bearing liabilities NC interest bearing liabilities Total debt Cash and cash equivs (Net Debt) / Net Cash (Net debt) / Net Cash per share Table 6: Solvency ratios Net Debt : Equity 26% 26% 21% 16% 12% 13% 13% Net Debt : Assets 17% 14% 11% 9% 7% 7% 7% LVR - Loan to value ratio 22% 25% 22% 19% 21% 22% 23% Gearing (net debt : total assets) 17% 14% 11% 9% 7% 7% 7% Net debt to free cashflow 1.5x 1.6x.6x.5x.4x.5x.5x EBITDA : Net Interest* n.a n.a 6.4x 7.4x 7.4x 6.3x 5.9x * Interest is capitalised to the balance sheet and expensed as a cost of goods sold. Wilson HTM Equities Research 15

16 Dividend profile We forecast the dividend increasing inline with any improvement in NPAT. Whilst the free cashflow generation would permit a higher dividend, we believe that much of the retained earnings will be used to purchase new development sites over coming years. The dividend yield should stay relatively stable at around %, based on our assumptions regarding the residential real estate market. Table 7: Dividend profile Net Debt : Equity 26% 26% 21% 16% 12% 13% 13% Net Debt : Assets 17% 14% 11% 9% 7% 7% 7% LVR - Loan to Value Ratio 22% 25% 22% 19% 21% 22% 23% Gearing (net debt : total assets) 17% 14% 11% 9% 7% 7% 7% Net debt to free cashflow 1.5x 1.6x.6x.5x.4x.5x.5x EBITDA : Net Interest* n.a n.a 6.4x 7.4x 7.4x 6.3x 5.9x Chart 22: Forecast dividend yield CPS Dividends (CPS).5 Dividend yield. Yield (%) 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Chart 23: Dividend yield (FY16) (%) 8% 7% 6% 5% 4% 3% 2% 1% % Source: Capital IQ, IRESS, Wilson HTM Divid. Yield S&P/ASX 3 S&P/ASX SMALL INDUSTRIALS AVJ CWP DVN PPC SDG Guidance Key guidance provided by management for FY16 includes: - Level of contracts carried over into 1H FY16 gives a strong start to FY16 - FY16 contract signings guidance is 1,8 to 2,1 lots - Adverse weather impact on FY15 will benefit FY16 - FY16 outlook based on projects already acquired - Acquisitions in FY15 provide strong base for operations beyond FY16 - Dividend policy of 4-5% of NPAT Wilson HTM Equities Research 16

17 Table 8: Earnings forecasts Sales growth (%) 61.4% 26.8% 19.7% -2.4% -3.6%.2% 4.2% Gross Profit margin (%) 19.4% 24.4% 25.% 25.% 25.% 25.% 25.% growth (%) 85.4% 59.4% 22.5% -2.4% -3.6%.2% 4.2% Total other revenue margin (%) 4% 3% 2% 2% 2% 1% 1% growth (%) 5.4% 16.3% -48.3% 49.4% -22.6% -37.1% 3.% EBITDA margin (%) 9% 15% 14% 14% 14% 13% 13% growth (%) % 11.7% 12.8% 3.3% -6.6% -4.8% 4.1% EBIT margin (%) 9% 14% 14% 14% 14% 13% 13% growth (%) % 13.3% 13.5% 3.3% -6.6% -4.8% 4.1% NPAT (Normalised) margin (%) 6% 1% 1% 1% 1% 9% 9% growth (%) % 19.4% 1.9% 3.5% -6.6% -4.9% 3.9% NPAT (Reported) margin (%) 8% 11% 1% 1% 1% 9% 9% growth (%) -223.% 83.1% 2.5% 3.5% -6.6% -4.9% 3.9% EPS (Normalised) EPS (Reported) Dividends (CPS) CURRENT ASSETS Cash and cash equivs Trade and receivables Inventories Total Current Assets NON-CURRENT ASSETS Trade and other receivables Property, plant and equipment Inventory Intangibles Investments (equity method) Total Non-current Assets Total Assets CURRENT LIABILITIES Trade and other payables Total Current Liabilities NON-CURRENT LIABILITIES Deferred tax liabilities Trade and other payables Interest bearing liabilities Total Non-current Liabilities Total Liabilities EQUITY Total Equity Receipts from customers Payments to suppliers Other Cashflows from operations Cashflows from investing Cashflows from financing Chg in cash Cash close Wilson HTM Equities Research 17

18 Valuation We adopt a target price of $.63/sh, based on the average of our EV/EBITDA valuation of A$.59/sh, PE valuation of $.71/sh, dividend yield valuation of $.62/sh and discounted cashflow valuation of $.61/sh. In deriving our valuation we have adopted a 15% discount to the average EV/EBITDA multiple and PE multiple of the competitive set and a 1% premium to the average dividend yield of the competitive set. The adopted multiple discounts reflect our perceptions around the AVJennings portfolio relative to competitors. In deriving our DCF valuation we have adopted a weighted average cost of capital (WACC) of 12.3%. Our adopted valuation of $.63/sh reflects an FY16 EV/EBITDA of 6.5x, a FY16 PER of 6.8x and a FY16 Dividend Yield of 6.5%. This compares with the S&P/ASX 3 Small Industrials index at an EV/EBITDA of 9.1x and PER of 14.6x. Table 9: Summary of valuation methods EV/EBITDA PER Divid Yield DCF Valuation $.63 Enterprise Value 315 Enterprise Value 36 Enterprise Value 325 Enterprise Value 321 Net Debt 89 Net Debt 89 Net Debt 89 Net Debt 89 Equity Value 226 Equity Value 271 Equity Value 236 Equity Value 232 Shares on issue 381 Shares on issue 381 Shares on issue 381 Shares on issue 381 Valuation $.59 Valuation $.71 Valuation $.62 Valuation $.61 NTA (Jun-15).88 Adopted Multiple 6.2x Adopted Multiple 7.7x Adopted Divid Yield 6.6% WACC 12.3% Discount -28% Source: Wilson HTM Table 1: Valuation metrics Valuation Mths Fwd 24Mths Fwd 36Mths Fwd Enterprise Value 329 Net Debt 89 Equity Value 24 Shares on issue 381 Valuation $.63 Prem. Disc 16.7% Dividend Yield 7.6% TSR 24.3% EV/EBITDA 14.8x 7.3x 6.5x 6.3x 6.8x 6.5x 6.4x 6.9x EV/EBIT 15.x 7.4x 6.5x 6.3x 6.8x 6.5x 6.4x 6.9x PER 15.8x 7.6x 6.8x 6.6x 7.x 6.7x 6.7x 7.2x Divid Yield 3.2% 6.3% 6.5% 6.7% 6.% 6.6% 7.2% 5.9% Source: Wilson HTM Wilson HTM Equities Research 18

19 Relative value AVJennings is trading toward the bottom of the range compared with similar companies (using our earnings estimates). The principal anomaly for us is the NTA discount. With AVJ trading at a 38% discount to NTA, this appears excessive given the portfolio of projects held by AVJennings (staged integrated developments). In terms of earnings multiples, AVJennings also looks relatively cheap. That said, we place only modest reliance on earnings multiples, given the timing mismatch that exists between accounting profits and cashflows. Table 11: Comparable multiples ASX Company Name Prem / T/P Price Mkt Cap P/NTA EPS Growth DPS Growth EV / EBITDA EV / EBIT PER Divid. Yield (A$/sh) (A$/sh) (m) AVJ 17% % 11% 3% -7% 2% 4% -11% 6.7x 5.9x 5.7x 6.1x 6.7x 5.9x 5.7x 6.1x 6.5x 5.8x 5.6x 6.x 7.4% 7.6% 7.9% 7.% SDG Sunland Group Limited % -1% 12% 5% -29% 12% 5% 8.6x 8.5x 7.3x 5.2x 8.7x 8.7x 7.4x 5.3x 9.4x 9.5x 8.5x 5.7x 6.3% 4.4% 5.% 7.4% VLW Villa World Limited % 7% 9% 5% 3% 6% 6% 9.x 6.6x 6.1x 5.7x 9.2x 6.7x 6.1x 5.8x 8.2x 7.7x 7.1x 6.7x 7.7% 8.% 8.5% 8.9% DVN Devine Limited % 27% 48% -1% 27% 48% n.a 9.9x 7.9x 6.x 4.x 1.6x 8.3x 6.2x.x 11.4x 8.9x 6.x.x 4.8% 6.1% 9.1%.% CWP Cedar Woods Properties Limited % 52% 2% 8% 2% 8% 6% 9.8x 6.3x 6.x 5.3x 9.9x 6.4x 5.6x 5.3x 11.7x 7.7x 6.4x 6.x 6.7% 6.8% 7.4% 7.8% PPC Peet Limited % 9% 9% 8% 7% 8% 11% 7.3x 7.5x 7.x 6.6x 7.5x 7.4x 7.1x 6.8x 12.5x 11.5x 1.6x 9.8x 4.3% 4.6% 5.% 5.6% Min 1-59% -1% 9% -1% -29% 6% 6% 7.3x 6.3x 6.x 4.x 7.5x 6.4x 5.6x.x 8.2x 7.7x 6.x.x 4.3% 4.4% 5.%.% Median 289-1% 9% 12% 8% 3% 8% 9% 9.x 7.5x 6.1x 5.3x 9.2x 7.4x 6.2x 5.3x 11.4x 8.9x 7.1x 6.x 6.3% 6.1% 7.4% 7.4% Ave % 19% 19% -6% 2% 16% 18% 8.9x 7.4x 6.5x 5.4x 9.2x 7.5x 6.5x 4.6x 1.7x 9.1x 7.7x 5.6x 6.% 6.% 7.% 5.9% Max 57 15% 52% 48% 5% 27% 48% 5% 9.9x 8.5x 7.3x 6.6x 1.6x 8.7x 7.4x 6.8x 12.5x 11.5x 1.6x 9.8x 7.7% 8.% 9.1% 8.9% ASX Company Name T/P Price Mkt Cap P/NTA EPS Growth DPS Growth EV / EBITDA EV / EBIT PER Divid. Yield (A$/sh) (A$/sh) (m) MGR Mirvac Group 1.7 6,274-3% 6% 8% 7% 5% 4% 7% 14.5x 14.x 13.1x 12.1x 15.3x 14.2x 13.3x 12.5x 13.8x 13.x 12.1x 11.3x 5.5% 5.8% 6.1% 6.5% LLC Lend Lease Group ,71 17% 1% 9% 5% 9% 9% -1% 9.7x 8.8x 8.2x 7.8x 1.6x 9.6x 8.7x 8.3x 12.4x 11.2x 1.3x 9.7x 4.1% 4.5% 4.9% 4.8% SGP Stockland ,11 3% 8% 5% 6% 2% 4% 4% 18.6x 15.9x 14.9x 13.7x 19.1x 16.6x 15.6x 14.7x 14.6x 13.6x 12.9x 12.3x 6.3% 6.5% 6.7% 7.% ASX Index Name EPS Growth DPS Growth EV / EBITDA EV / EBIT PER Divid. Yield XKO S&P/ASX 3.5% 9.3% 1.% 1.2% 5.4% 6.7% 1.7x 12.x 1.8x.x 13.3x 14.5x 13.1x.x 14.9x 14.9x 13.9x 12.7x 4.9% 5.% 5.3%.% XSI S&P/ASX SMALL INDUSTRIALS.1%.1%.1% 5.4% 11.3% 8.9% 9.1x 9.1x.x.x 11.6x 11.6x.x.x 15.4x 14.6x 13.5x 12.5x 4.1% 4.4%.%.% (x) 2% P/NTA: Jun-15 (x) EV / EBITDA x (x) EV / EBIT x (x) PER x (x) Divid. Yield % % -2% 8x 6x 8x 6x 12x 1x 8x 8% 6% -4% 4x 4x 6x 4% -6% -8% P/NTA: Jun-15 CWP VLW PPC SDG AVJ DVN 2x x EV / EBITDA SDG DVN PPC VLW CWP AVJ 2x x EV / EBIT SDG DVN PPC VLW CWP AVJ 4x 2x x PER PPC SDG DVN CWP VLW AVJ 2% % Divid. Yield VLW AVJ CWP DVN PPC SDG Source: Capital IQ, IRESS, Wilson HTM Wilson HTM Equities Research 19

20 Relative value analysis In undertaking our valuation we have adopted a 15% discount to the average EV/EBITDA and PE multiple from the competitive set (Table 11), adopting 6.2x and 7.7x, respectively. Notably the delta between the EBITDA and PE multiple is relatively low at 1.5 multiple points this is a result of most interest expenses being capitalised to the balance sheet and passing through the operating cost line. The second observation is that the average PE of 9.1x for the competitive set is low, relatively to the S&P/ASX 3 Small Industrials (14.6x) this is driven by low barriers to entry and the lack of visibility over future earnings (hence of preference for DCF as the primary method of valuation). In undertaking our dividend yield valuation, we have adopted a dividend yield of 6.6%, being a 1% premium to the average of the competitive set. Accordingly, our valuation of $.63/sh reflects an FY16 EV/EBITDA multiple of 6.5x, a FY16 PE ratio of 6.8x and a FY16 Dividend Yield of 6.5%. As we look through the above comparable company metrics, we observe P/NTA premiums/discounts ranging from +15% (CWP) to -59% (DVN). AVJ s current P/NTA discount of 38%, reflects one of the deepest discounts across the competitive set. The discount / premium to NTA assumed by the market is often a view on the quality of the assets (ie does the NTA reflect the economic and realisable value of the land). For example, we would expect to see a higher NTA discount on Devine given its exposure to Northern Queensland, likewise Sunland (SDG) which has higher exposures to multi-unit apartment towers in South East Queensland these are undoubtedly higher risk segments. The anomaly for us is AVJennings, which has a diverse portfolio of lower density residential estates. In fact we see the most comparison between AVJennings and Villa World (VLW). We generally accept that P/NTA is a mean reverting measure and as such we expect the P/NTA to slowly increase towards ~1.x as the company converts its land bank to contracts, then settlements and finally cash. Chart 24: Price to earning ratio (FY16) (x) 16x 14x 12x 1x 8x Chart 25: Price to Net Tangible Asset P/NTA (x) P/NTA (x) 6x 4x 2x x PER S&P/ASX SMALL INDUSTRIALS SDG DVN CWP VLW AVJ.4.2. AVJennings is currently trading at a 38% discount to its current NTA of 88cps VLW PPC SDG AVJ DVN Source: Capital IQ, IRESS, Wilson HTM Source: Capital IQ, IRESS, Wilson HTM Wilson HTM Equities Research 2

21 Chart 26: Relative share price performance Common Base AVJ SDG VLW DVN 5 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Source: IRESS, Wilson HTM Amongst a wider competitive set, we believe the most comparable developers are Sunland, Villa World and Devine. Whilst AVJennings (AVJ) has declined 12% in the past twelve month, Sunland Development Group (SDG) has declined 6%, with Devine (DVN) down 26% and Villa World (VLW) up 11%. How we compare to consensus FY15 FY16 FY17 FY PL_OPERATING_REVENUE Wilson HTM Current (A$m) CONSENSUS (A$m) Delta (%) 5.2%.4% -5.4% We forecast FY16 to be a big year, with an elevated number of settlements to occur in NZ. PL_EBITDA Wilson HTM Current (A$m) CONSENSUS (A$m) Delta (%) -16.2% -13.2% -19.3% PL_EBIT Wilson HTM Current (A$m) CONSENSUS (A$m) Delta (%) -15.7% -12.7% -18.9% PL_PROFIT_BEFORE_TAX Wilson HTM Current CONSENSUS (A$m) Delta (%).9% 6.7% -.5% PL_NPAT_ADJ Wilson HTM Current (A$m) CONSENSUS (A$m) Delta (%) 1.% 6.9% -.4% There is different treatment of interest payments between consensus contributors. Best to compare BPT as we capitalise interest on developments, as per the company s reporting methodology. EPS_NORM Wilson HTM Current (A$m) CONSENSUS (A$m) Delta (%) 1.7% 7.5%.5% EPS_REP Wilson HTM Current (cps) CONSENSUS (A$m) Delta (%) 1.7% 7.5%.5% DPS_TOTAL Wilson HTM Current (cps) CONSENSUS (A$m) Delta (%) 2.5% 6.3% -5.5% Source: Capital IQ, Wilson HTM Note: There is currently only one analyst currently contributing to consensus. Wilson HTM Equities Research 21

22 Sector overview The Housing Industry Association (HIA) forecasts peak construction spending at $51.4Bn in FY15 and then declining over the next three years of forecasts (Chart 27). The HIA is forecasting detached dwelling construction starts to reach 11, dwellings in FY16 (Chart 28), with multi-dwelling construction to have peaked in FY15 at 11, units (Chart 28). Chart 27: Residential construction forecasts (A$m) Chart 28: HIA housing starts (qty) Source: HIA (Jul-15) Source: HIA (Jul-15) Chart 29: Building Approvals, Australia (Aug-15) approvals 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Total number of Houses Total number of units Total number of dwelling units Jul 84 Jul 89 Jul 94 Jul 99 Jul 4 Jul 9 Jul 14 The abnormality appears to be the elevated level of apartment approvals Source: ABS, Building Approvals, Australia, Aug 215 Chart 3: House Approvals, Aust. Chart 31: Units Approvals, Aust. Chart 32: Total Housing Approvals approvals /- 2 std dev 2 Total number of Houses Average Jul 84 Jul 94 Jul 4 Jul 14 approvals /- 2 std dev Total number of units Average Jul 84 Jul 94 Jul 4 Jul 14 approvals /- 2 std dev Total number of units Average Jul 84 Jul 94 Jul 4 Jul 14 Source: ABS Source: ABS Source: ABS Wilson HTM Equities Research 22

23 Looking through the cycle Whilst we fully appreciate some elements of the Australian real estate market are elevated, from a macro view it s hard to see a bubble from a supply perspective. Chart 33 looks at the rolling YoY change in population versus aggregate YoY rolling new dwelling approvals. It appears to us that despite an increase in the aggregate level of population growth, the level of new dwelling approvals has hardly shifted this is likely causing the price pressure. What the below charts fails to capture is affordability. Chart 33: YoY change in population versus new dwelling approvals YoY Chg Pop 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Chg in Population New Houses Jun 91 Jun 96 Jun 1 Jun 6 Jun 11 Source: ABS, Wilson HTM Approvals 14, 12, 1, 8, 6, 4, 2, Whilst the population has grown in volume since the 9 s, the number of approvals has remains rather static. Whilst we have seen a gradual increase in the population, the number of approvals has been relatively static (albeit noisy). Looking at approvals as a proportion of the population, we can see that the current level of approvals is not particularly elevated. Chart 34: Approvals remain constant despite pop increase Pop (m) Approvals (qty) , Chart 35: Approvals as a percentage of pop increase (%) 12% Population Approvals 1. Jan Jan 2 Jan 4 Jan 6 Jan 8 Jan 1 Jan 12 Jan 14 12, 1, 8, 6, 4, 2, 1% 8% 6% 4% 2% Approvals (private sector residential) / YoY chg in population % Mar 92 Mar 97 Mar 2 Mar 7 Mar 12 Source: ABS, Wilson HTM Source: ABS, Wilson HTM Wilson HTM Equities Research 23

24 Building approvals and house prices In Chart 31 we see that current unit approvals are in excess of two standard deviations from the long term average. Whilst not all approved schemes will be built in the current cycle, the level of approvals is of concern. Detached housing approvals on the other hand remain relatively unchanged. Whilst we understand that an increasing population often translates directly to increased density, the level of apartment approvals, combined with the influence of investors, is a red flag. Impact on AVJennings: AVJennings is land rich and it appears that land has been the prime beneficiary of the recent growth. That said, the underlying land value for some of AVJennings sites is predicated on a development approval for medium density product. Chart 36: Median vacant land prices over time Chart 37: Median sq m rate for vacant land over time Source: CoreLogic RP Data (Jul-15) Source: CoreLogic RP Data (Jul-15) Market structure of Australian residential real estate Domestic dwelling sales in Australia are driven by the macro themes of: Credit availability: The availability of credit has been a defining feature of the Australian real estate market since the financial deregulation of the 199 s. During this period Australia has seen a 2.7x increase in the ratio of household debt to income. That said, interest payments as a percentage of annual household disposable income has declined more recently, along with interest rates. Chart 38: Household Finances (% of annual household disposable income) Chart 39: Household Wealth and Liabilities (% of annual household disposable income) Source: Reserve Bank of Australia Source: Reserve Bank of Australia Wilson HTM Equities Research 24

25 Speculative appetite of buyers: Given that Australia is generally considered a supply constrained market, speculative fervour is likely to have a substantial impact on housing markets, a trend which is currently most evident in the Sydney metro market. The role of investors within the Australian residential real estate market is likely the result of many factors including the taxation regime, ageing population, the high proportion of wealth traditionally held by Australians in property, foreign investment and the availability of credit. Chart 4: Value of housing finance commitments monthly, national Source: RP Data (chart pack Sept-15) Land availability / town planning: The States and Territories, in conjunction with local governments, have responsibility for a range of policies that directly influence housing supply, including land release, land planning and zoning, stamp duty and land taxes. Local governments have primary responsibility for local infrastructure and council rates. Land availability remains a double edged sword, whilst restricted supply enhances the value of existing land banks, it may constrain the capacity of developers to acquire and develop new communities. Chart 41: Housing shortage Despite changes in dwelling values, Australia remains supply constrained Source: Company data, ANZ, ABS Wilson HTM Equities Research 25

26 Key drivers of demand for residential real estate Household formation: The Mar-15 ABS Household and Family Projections study forecasts the number of households in Australia to increase from 8.4m in 211 to between 12.6m and 12.7m in 236. This is an increase of between 4.2m and 4.3m households, or 49% to 51%. Over the same period, Australia's population is projected to increase by 45%, from 22.3m people to 32.4m people. The average household size in Australia was 2.6 people per household in 211, and is projected to be between 2.5 and 2.6 people per household in 236. Whilst the number of lone person households is growing at a much faster rate than other categories, family household formation remains the dominant category. Chart 42: Projected number of households - Australia population (m) Family households Group households 5 Lone person households Table 12: Projected growth, households, selected countries Projected average annual growth Average Household Size rate, % persons persons Australia England Scotland New Zealand Japan Source: Household and Family Projections, Australia, 211 to 236 Source: Household and Family Projections, Australia, 211 to 236 Consumer sentiment: Consumer confidence remains below average. As a general rule, we consider a Westpac index of sub-1 to be contractionary and a red flag. We believe that consumer confidence is heavily reliant on consumer expectations for, among other things, unemployment and inflation both of which are relatively benign when considered from a long-term perspective. The change in consumer confidence is the primary output of the survey (ie is the mood of consumers improving or deteriorating). While we continue to look at the trend in confidence, the series is highly volatile. Over the short term, we have seen unemployment rising and GDP growth being relatively lacklustre. The one ameliorating factor here has been asset prices, which have likely been a support for consumption (see Chart 43). Chart 43: Annual chg in consumer sentiment vs dwelling values Chart 44: Consumer sentiment vs dwelling sales Source: RP Data (chart pack Sept-15) Source: RP Data (chart pack Sept-15) Wilson HTM Equities Research 26

27 Population growth: In the 2 years to Jun-12, Australia's population increased by 1.3% per year on average, with just over half of this growth resulting from net overseas migration (NOM) and just under half from natural increase (the excess of births over deaths). In the last two years, Australia's population has increased by 1.6% per year on average, with the contribution of NOM growing to 56%, and natural increase decreasing to 44%. In the natural population increased by 158,8, with a further 219,295 people arriving in Australia through net migration based on the average of 2.6 people per household, this would suggest demand for an additional 145, dwellings. Whilst this trend is positive for the underlying fundamentals of housing, the change is modest relative to the overall population. Chart 45: Qtr chg in national population Source: RP Data (chart pack Sept-15) Interest rates: Interest rates remain at relatively low levels. On the assumption that the base rate remains relatively unchanged over the medium term, the low cost of debt should assist the residential housing market. That said, according to the Reserve Bank of Australia 6.8% of household disposable income is consumed by interest payments on housing and other personal debt, higher than 1989, when mortgage rates peaked at 17%. Chart 46: Interest rates Source: RP Data (chart pack Sept-15) Chart 47: Medium density housing as a percentage of total dwelling approvals Medium density development continues to increase its proportion of total development approvals. Source: BankWest Medium Density Housing Report (Feb-15) Wilson HTM Equities Research 27

28 Business overview Summary of business AVJennings is an Australian residential property development company listed on the Australian Securities Exchange (ASX) and Singapore Exchange (SGX). AVJennings is a developer of high quality, value for money, master-planned communities and urban renewal sites in Australia and New Zealand. AVJennings undertakes its developments entirely on land which is owned or controlled by the company, using its in-house construction teams. The developments are predominantly staged, with few developments being high rise. Lines of business AVJennings product offer can be summarised as follows: 1. Land Development Land allotments within an AVJennings estate can be: Purchased by a customer who can choose their own builder Third party builders can purchase and build their own product and on sell Packaged up with a third party builder to create a house and land package 2. Integrated Housing Master-planned neighbourhoods with completed product designed, constructed and sold with warranty by AVJennings: Detached home including kitchen appliances, flooring, driveways, fencing and landscaping Duplex home including kitchen appliances, flooring, driveways, fencing and landscaping Townhome / townhouse generally in a row of 4-6 properties which include kitchen appliances, flooring, driveways, fencing and landscaping Terrace generally in a row of 6 plus properties which include kitchen appliances, flooring, driveways, fencing and landscaping 3. Apartments Within a low rise multi-storey development planned, designed and constructed by AVJennings: Apartments from AVJennings include kitchen appliances, flooring, car space, common areas, body corporate set-up Figure 1: Land bank profile Source: Company presentation Wilson HTM Equities Research 28

29 Figure 2: Target segment Source: Company presentation Buyer profile Retail Customers: generally split 15-2% first homebuyers, 25-3% domestic investors, 5-6% trade-ups/ downsizers and foreign domiciled buyers at approximately 1%. B2B Business: other builders buy AVJennings land to build on. AVJennings continues to focus of the affordable end of the residential market (ie land subdivisions on the urban fringe). Chart 48: Average house sale price (12 mths to Jun-15) Source: Company data Wilson HTM Equities Research 29

30 Appendix A: Board, management and substantials Board Simon Cheong B.Civ.Eng. MBA Chairman (Non-Executive) Jerome Rowley SF Fin, FAICD Deputy Chairman (Non-Executive) Peter K Summers B.Ec. CA Managing Director and Chief Executive Officer Elizabeth Sam B.A. Hons. (Economics) Director (Non-Executive) Bobby Chin CA (ICAEW) B.Acc. Director (Non-Executive) Bruce G Hayman Director (Non-Executive) Teck Poh Lai B.A. Hons. (Economics) Director (Non-Executive) David Tsang B.A. (Economics) Director (Non-Executive) Management Allan Soutar Executive General Manager (NSW & VIC) Larry Mahaffy Chief Financial Officer Stenio Orlandi Chief Strategy Officer Carl D Thompson Company Secretary/ General Counsel Lisa Hunt General Manager, Human Resources Table 13: Substantial holders Name Shares % SC Global Developments Ltd 192,318,3 5.3 IOOF Holdings Limited 43,897, Paradice Investment Management Pty Ltd 22,359, Source: Company accounts Wilson HTM Equities Research 3

31 Appendix B: Project pipeline at 3 June 215 Source: Company presentation Wilson HTM Equities Research 31