Peet Limited (PPC) Earnings Call Transcript

Thank you for standing by, and welcome to the Peet Limited FY '25 Results Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Fullarton, Interim CEO. Please go ahead.

FY '25 results presentation. With me this morning is Greg Wall, the Chairman of our Board of Directors. Greg is going to make a few comments shortly with respect to the strategic review that we announced back in May -- earlier this year. So I'll hand to Greg shortly. But before we get to that, we want to move straight to the results highlights. So on the slide in front of you, for those of you that are doing it old school and with hard copies, I'm on Page 3. Net profit for FY '25 of $58.5 million, really strong performance. We guided the market back in February and gave a range of 50% to 55%. We upgraded that in April, 55% to 58%, and we've ended a little beyond the high end of that range, which is a really pleasing outcome. Earnings per share, likewise up 61%, a little bit more than operating profit because of the impact of the share buybacks. Dividends. So we have declared a final dividend of $0.05 per share with respect to FY '25, which brings total dividends for the year to $7.75 million. EBITDA margin, very pleasingly up to 24% from 21% last year. So key underlying driver of the increase in margin is price growth across the portfolio, which is terrific. Gearing. Quite a step change in gearing and we'll talk in a little bit more detail about that later, but gearing has come down from 34.8% to 27.5%. So quite a step change in gearing, driven by really strong operating cash flows which as I said, I'll get to shortly. In terms of volumes, the right-hand side of the picture, sales are up about 11% to 2,768, settlements up about 9%, 2,642. A really strong contracts on hand position at 30 June '25 of $612 million, that number 12 months ago at June '24 was $481 million. So we move into FY '26 with a really strong contracts on hand position, which obviously gives us a lot of confidence. And a key metric for us internally is this land bank activation at 71%. So just to give that some context, that is the percentage of our land bank that sits within projects that have been launched and therefore, projects that are up and away, developing, selling, settling, et cetera, and therefore, contributing to both earnings and cash flow. Moving to Page 4, there is a lot of detail on this slide. What I'd like to do is just highlight a few matters. And this really sets out where we sit within the Australian residential sector. I want to highlight how we're responding very directly to some very favorable macro conditions. So we are experiencing as a nation, very strong population growth, 1.7% nationally, fueled by overseas migration. There is a chronic housing shortage in the country, very constrained housing supply with 400,000 dwellings short as we speak today. Governments of various descriptions, federal state, et cetera, doing -- trying to do lots of things to address the supply side issue, but that is a long and slow process for those policies to really have effect very, very low vacancy rates across rental portfolios in major capitals around the country. And an environment for our customers, a favorable borrowing environment, I mean that column, our customers -- we have seen real wage growth over the last couple of years. Interest rates are coming down as we know. There are still cost of living pressures, but inflation is easing, and governments do continue to provide stimulus and support for homeownership. So for customers that might be out there looking to buy a lot -- a block of land in a peak project, that environment is improving. And we're seeing strong appetite for capital to have exposure to the Australian residential sector. So for us, that presents opportunity for capital partners to come and support us in taking advantage of the current market conditions. So we are highly leveraged to these market conditions, and they really line up like we're seeing them at the moment. And we're extremely well placed to benefit from all of these macro drivers that we think will persist for at least the medium term. What I'd like to do now as we move to Slide #5, let's just hand over to Greg, our Chairman of the Board of Directors, just to make a few comments around our strategic review.

Thanks, Brett, and good morning all. As Brett said, we announced the strategic review in May this year. And Pet comes into this review from a position of strength. We're in a solid financial position and delivered strong results, as Brett has just talked about, and they have a favorable outlook for FY '26. So we thought it was an opportune time to proactively assess our strategic position to capitalize on the favorable market dynamics of the Australian residential sector. To assist us in this review, we have appointed Goldman Sachs. They will lead the review to ensure an independent expert analysis and a market informed recommendations for this review. The review will cover the key aspects of Peet business to ensure that we're optionally positioned for future growth and value creation. The review is about strengthening our position, unlocking value and preparing for future opportunities. It ensures that Peet make smart, informed decisions that drive value for shareholders. The work is already underway, and we look forward to updating shareholders on the progress of that review at the AGM later this year. Thanks, Brett.

Thanks, Greg. Let me keep moving the next couple of slides are a reminder of the Peet business model and our strategy, so we can move through these reasonably quickly. But on Page 6, which is in front of you now, our strategic pillars, master-planned communities, townhouses and low-rise apartments remains unchanged. We do have geographic diversity across the portfolio that allows us to leverage off state-based fluctuations. And as we've seen in the year just ended, notwithstanding markets in Victoria and the Canberra region, we've still delivered very, very strong financial outcomes. We have a very low cost base across the portfolio. And internally, we have great capability, great experience to execute across those markets. And moving to Slide 7, so overlaying those strategic pillars across our land bank. We have a very significant land bank, almost 31,000 lots, low-cost base, as I said, and value of over $13 billion. And as you can see on that slide, the geographic spread across the various states within which we operate and 43 projects. And again, just to refer back to the activation. So of those total lots, 71% of them sit within projects that are active. So that puts us in a great position to leverage the current market conditions. And then Slide 8, just to reflect briefly on some of the key strategic outcomes that were achieved in FY '25. We continue to invest a couple of new projects underway. We continue to expand the Glendalough project, townhouse project in WA was launched. We've now sold through the first stage and moving into stage Forestville in Adelaide, likewise, 71 townhouse project, maintaining a focus on capital continues to [Technical Difficulty]

Here, you there? Ladies and gentlemen, we have lost the line for the management. Please stay online while we get them reconnected. Thank you. Ladies and gentlemen, the management has been reconnected. Thank you for staying online. Please go ahead, Brett.

Thanks, Alara. Thank you, everybody, for your patience. My apologies for that. We are not sure how that happened, but these things are sent to test us, but that's okay. Let's move forward. So I'm now on Page 9. I think I cut out a little bit through Page 8, but let's just move to Page 9, which is a picture that really shows what the company has been able to build over quite a period of time. And position us so well for the markets, the favorable market conditions that we can see. So this is 11 of over 40 projects on this page. So these are the major dial movers for us. And as you can see, if you look back 5, even 10 years, the company was in a very different position than where we are today as we move forward into the next 3, 4, 5 years and beyond with such a high level of activation across major projects. So this sets us up very, very well to respond to these positive market conditions that we think will be with us for at least the medium term. On Page 10, let me move reasonably quickly through this. It is part of our DNA to deal with and comply with and outperform in some respects, ESG obligations, just to point to a couple of things we're particularly proud of in the FY '25 highlights side of that slide. The Golden Bay project here in Western Australia, Southern corridor achieved Best Master Planned Community Award from the Property Council, that was a really great outcome for that team. And there are lots of criteria that need to be met to achieve that outcome. So we're really proud of that. And it's also worth noting the Tonsley Village project, so that's a project in Adelaide, where we have been a key part of connecting over 500 homes to the embedded electrical network that is powered by solar panels. So again, an achievement we're very, very proud of. Let me move now to a little bit more detail with respect to the financial results. And I'm just going to point to some key highlights. So the operating profit, you can see on that page, driven by a significant increase in revenue, $314.4 million up to $437.3 million, generated largely by on-balance sheet development projects and an increase in funds management fee income led to a very significant uplift in EBITDA and therefore, in operating profit to $58.5 million, which I've already spoken to, which has given us the opportunity to have a material uplift in dividends. And as I said earlier, a large part of that margin improvement has been driven by price increases across our various products and markets. Now turning to cash flow, and I'm on Page 13 of the presentation. Again, just to highlight the strength of the performance, a significant uplift in receipts from customers, very high correlation of that number with revenue in the P&L, again, driven by on-balance sheet projects and funds management income, giving us operating profit -- operating cash flow, sorry, before acquisitions of $117.5 million, up from essentially breakeven last year, but we do need to spend the money before we make the money. So there was a significant investment in FY '24 creating the product that was then delivered in FY '25. So capital recycling in action. Payments for land acquisitions at $5.8 million term payments, so we made our last payment for the Flagstone project in FY '24. So you can see the $22 million dropping to $5.8 million. Now the only term payments remaining related to the University of Canberra project. So a very strong operating cash flow outcome. Turning to balance sheet on Page 14. Again, just to point to a couple of key outcomes in the metrics on that page. Around the middle of the page, you can see net debt down from $316 million to $243.6 million, so over a $70 million reduction, which has led to gearing outcome, as I said right upfront, coming down from 34.8% to 27.8% and putting us back into our preferred range of 20% to 30%, all of that obviously driven by those very strong operating cash flows. Weighted average debt maturity at 2.3 years because of the arrangements we've just struck with our banking syndicate things that were literally signed off this week by the Board, that debt maturity pushes out to 3 years. Weighted average cost of debt has crept up 8.1% to 8.3%, and that is largely because the Peet notes are now a larger proportion, a higher proportion of total debt. So as we've reduced debt, the weighted average cost of that debt has edged up, notwithstanding total debt has come down because of that dynamic. And moving to shareholder returns. Pleasingly, on Page 15, dividends in the top right-hand part of that slide, you can see the upward trend FY '24 being a cyclical low. But for that, you can see the upward trend in our expectation certainly is that the years ahead continue that upward trend. In terms of total shareholder returns, $232 million. And just to put that in context, that is almost 40% of today's net asset position of the company. So having returned a very large proportion relative to the size of the business, over that period of time, we think, is pretty good. The buyback remains open. We have reduced shares on issue by around 4% since we started the buyback program. On average, we paid $1.7 for those shares. So well below NTA and obviously, very well below current market price. We have extended the through to September next year. A little bit more detail on underlying operating activity just where did we make our money. So on this page, you can see EBITDA composition by both business type and geography. So we have generated more profit from our balance sheet projects at 49%, that's the left-hand donut on that page. Last year, that was 47%. So we're almost 50-50 balance sheet and funds. Funds being combination of both JV and funds management. We would expect to see the 49% creep into the low 50s in FY '26. And geographic composition of our earnings, no surprise. WA and Queensland have accounted for 76% of EBITDA. Moving to volumes on Page 18. Again, no surprise in these metrics. You can see where we've delivered our sales volumes, 34% in Queensland, 39% in Western Australia. So WA and Queensland have contributed 73% of sales, and about 69% of settlements. The other elements on this page that aren't possibly instantly obvious and this reflects upside in our view for the business as we move forward. Sales in the ACT New South Wales were 6%. Last year, that number was 0. We had net last year being FY '24. So we generated net 0. So there's improvement in the Canberra market, which bodes well, gives us upside as we move forward. And the Victorian sales of 10% in FY '24, they were 7%. So we are seeing a little bit of a tickle upwards in those Victorian sales again, which we think bodes well for the short-term future. Page 19 sets out inquiry levels. So they have leveled off as we expected they would. They remain above 10-year quarterly averages. There has been some normalizing across different markets as we expected, but we continue to have qualified waitlists in certain projects, particularly in Queensland and South Australia. But what underpins, I guess, our confidence as we move into FY '26 is our contracts on hand. So I'm on Slide 20 now. And you can see, as I said earlier, we started the year, we started FY '25 with $481 million of contracts on hand. We're going to launch into FY '26 with $612 million worth of contracts on hand. As of yesterday, that had moved up by about 4% to $642 million. So we are very well placed as we move into FY '26. And as we conclude by just making a couple of comments about the outlook. We have 7 new projects that will come on stream over the next 2 years. So again, this supports the activation statistic, I spoke about earlier. The higher the activation, the better place we are to take advantage of the very favorable market conditions that we're in. And in broad terms, those macro factors, overseas migration, population growth, the chronic housing shortage, the supply constraint, the activities that government are undertaking are good, but will take quite some time to have any effect. An improving position for our customers. Labor market labor conditions are good, interest rates are going down, across the various states in which we operate WAS Australia, Queensland continue to be solid for us and in some instances, continue to deliver price increases. And we think we're just about off the bottom now in ACT, New South Wales and Victoria, with some early signs of improvement. And so they set us up for growth as we move forward. So in conclusion, we think we're very well positioned for FY '26 with expectations that our earnings will grow and we'll continue to generate strong operating cash flows. So that concludes the presentation. I'm not going to walk through the appendices, and I'm going to hand back to our moderator, and Greg and I will be happy to field any questions that you may have.

[Operator Instructions] We have our first question on the webcast from Mark Eagle. Is a potential outcome of the strategic review or sale of the company?

Thanks for that question. Look, and our wider sectors currently have accept strong market fundamentals. As Brett mentioned, the housing shortage population growth, housing policy, falling interest rates -- so the market is quite strong. And the whole intent of this strategic review is to ensure that we have the right structure, the right access to funding, our asset base is well positioned to maximize the of these conditions and to our shareholders. We're certainly not shopping the company around. But at the same time, we wouldn't speculate on any possible transactions or any outcome of the strategic review. We keep an open mind opining the outcomes of that strategic review.

We have a next question from the webcast from Murray Palma. When do you expect to get the results of the strategic review?

Yes. Thank you again. We are well underway with the strategic review now and we hope to be able to make a presentation at the AGM, which is scheduled for later in November of the outcome of that strategic review.

We have 3 questions from Gavin Aron from webcast. The first 1 is cash generation in second half was an absolute highlight. How do we think of 2026, still harvesting or need to meaningfully reinvest or ramp up development?

Thanks, Gavin. I'll take that question. Yes, we had very, very strong cash flow second half FY '25, that's correct, driven by balance sheet projects, which included townhouse, quite a bit of townhouse product that's settled in second half. We do need to spend money to deliver into settlements. We have a big build program to deliver into those lots under contract. We have a large amount of work being done as we speak at Flagstone. We have the prospect of activating our Aston project in Victoria, subject to our view on market conditions in the months ahead. So there will be -- we will continue to have strong cash flows, but there will be a balance to make sure we are investing in our product to sustain ongoing settlements.