Originally Posted by
Mogul
Good questions. I do not have too much of a problem with Development Margin assumptions in the 20-25% range despite it being a drop from 28% (MET shareholders would love that level). Over the last 5 years from 2016 SUM development margins have been 20%, 22%, 27%, 33% and 28% and they have said for a long time that their long run expectation remains 20-25%. By way of comparison RYM development margins have been 24%, 19% and 30% over last three years and were as low as 20% in most recent half year partly due to Malvina Major partial demolition/rebuild. I suspect that SUM are factoring in a need to sharpen their pencil on pricing and/or incentives to lift sales in 2020 impacting margins. Cost and mix may also be drivers.
The larger concern for me is weak new unit sales which has been going on for four years already. As noted in a previous post, I think they must only be factoring in modest sales growth to around 370 units in 2020 (up from 329 in 2019 result), assuming a 24% development margin, to arrive at a flat underlying net profit forecast for 2020. It is concerning that SUM do not seem to have the confidence to back themselves to achieve a step up in new sales when they have acquired a land bank of over 5,000 units. It would be nice to see a bit more Mainfreight style frankness in SUM's shareholder communications, being transparent about what has not gone to plan and more direct on how they will address challenges.
The business is clearly not broken, but the issues around declining/flat new sales have added some uncertainty to the investment case. The "good news only pr style" shareholder communications are not helping build confidence for me.