TWD.AX - Tamawood Ltd

[Gregmal]

Queensland based home builder that is not really a typical home builder. Splendid track record since going public in 2000 and very much the owner-operator type management team. Very shareholder friendly. Grew revs 30%+ last year while paying out a nearly 7% dividend. Company is super conservative and has always been debt free. Franchising and services/systems model that de-risks the company from many typical problems a traditional home builder will run into. IMO kind of a very unexciting but superb business with a decent moat, great reputation and proven track record.

 

The big upcoming tailwind and reason to really get long is that there is a massive crackdown regulation wise on construction/home builders in Australia. This short term is adding to G&A as compliance costs increase to offset some of the underlying growth. However, these regulations will ultimately wipe out much of the competition(the company is primarily engaged in residential work which is much more mom and pop type competitors).

 

Per Chairman Robert Lynch-  “a period of aggressive regulatory enforcement” was adding to costs but would likely boost its bottom line by killing off smaller competitors."

 

With no debt, consistent dividend growth, and a regulations that will likely eliminate a good chunk of their competitors, trading at about 10x earnings, I think this company is massively underappreciated by the market given it's brand and staying power.

[kirkomi]

A major red flag is the transaction between related parties. It has bought/sold > AU$3M to related parties. For comparison: the profit for the year is ~ AU$9M.

 

I also find it a bit weird that they do not describe their business model.

 

"Tamawood is a “systems company”, not simply a home building company.

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In a similar manner to companies like McDonald’s, Flight Centre and Harvey Norman, Tamawood has entered a seemingly mature, fragmented industry, redefined and enhanced the value provided to customers, and has reconfigured the systems and processes by which that value is delivered ... efficiently and profitably."

 

I don't understand what that means. One possible explanation is this: they have a set number of home designs the client can chose from. This way they get cost savings, which end up with better margins. Unfortunately, it is not described anywhere that this is the case. I also looked at the report from 2004, which has more vanilla texts without any proper details.

[Gregmal]

The related party transactions, as a percentage overall revenue are not very material. Additionally, something to keep in mind is that this management team is very entrepreneurial, and are involved in some businesses that do business with TWD simply because of convenience and synergies. Resiweb is a good example of that. This is a product we should see integrated shortly which is essentially a free call option. From what I looked at, something like 60% of the $3m AUD in related party transactions were related to building materials.

 

The company does use somewhat promotional language when describing it's business model, but again, I don't really have an issue with that if they are producing. Why not get excited and present the business in the best way possible? The longer term track record here is exceptional. These guys have a stellar reputation and will benefit from regulation. All in all, red flags shouldn't be overlooked. But at the same time these things aren't massive issues to begin with, and when you look beneath the surface the reasons they exist are not outlandish. Then you look at the results these guys have produced and I am quite comfortable with the investment. Should red flags continue to regularly pop up, sure, you re-evaluate it. But these things have existed for a while and they are nothing alarming or overly symbolic of flaws to the business.

[Gregmal]

Cruising, up 12% from 5 weeks ago. Software biz being integrated. I'm anticipating a 25% rise in pre-tax earnings and at least 10%+ dividend growth for FY18.

 

Chairman's Letter can be found here http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01906725