7-7-2020:  Update on Impact from COVID-19

Fleetwood Corporation Limited (ASX: FWD) provided an update today to its 30 March 2020 announcement regarding the impact of COVID-19 on the business.

The Company:

• retains a strong balance sheet;
• had over $63m in net cash at 30 June; and
• has an undrawn facility with its financer Westpac of $50m.

Updates on Fleetwood’s operations are as follows:

Building Solutions Segment

Consistent with the 30 March announcement, there has been minimal disruption to construction between March and June.

There have been some minor supply chain impacts and alternative supply arrangements have been sought. No material disruption of projects has occurred.

Demand from the Government sector has remained strong consistent with recent announcements regarding infrastructure spending.

Given the high levels of economic uncertainty, demand from the private sector for smaller high margin works has been softer. This has had an impact on second half margins, as larger, lower margin projects dominated production, particularly in New South Wales and Western Australia.

There have been instances where clients have paid Fleetwood in June ahead of trading terms, totalling approximately $18m, and also prepayments for works to be completed early in the new financial year totalling $6m. This has boosted Fleetwood’s cash position by approximately $24m at 30 June.

Accommodation Solutions Segment

The 30 March announcement identified the possibility of disruption to the Company’s operations in the event that restrictions limiting fly-in fly-out workers were introduced.

While the Western Australian State government did introduce (and has since removed) intrastate travel restrictions, rather than limiting fly-in-fly out workforces, the effect of the restrictions was to cause the modification of rosters.

Fleetwood has worked with its customers during this period to implement changes to the way our Searipple Village in Karratha accommodates different rosters, including removing the practice of people who are on alternate rosters using one room. This has improved utilisation of the village in the June quarter.

RV Solutions Segment

The March announcement noted that demand for recreational vehicles was expected to decline moving into the fourth quarter. This has played out as expected, with a significant reduction seen in volume from caravan manufacturers. Notwithstanding, there have been mixed reports regarding new and used caravan sales from the retail sector.

The impact on the aftermarket has not been as severe as that seen with manufacturers. This is likely due to existing caravan owners buying aftermarket parts and services to ready their RVs for travel once restrictions ease.

Jobkeeper payments, arrangements with landlords and significant restructuring of the fixed cost base, has meant no losses have been encountered in the RV Solutions segment to date.

Given the planned end of Jobkeeper payments in September and the rapidly evolving COVID-19 situation in Victoria, the RV Solutions segment is being monitored closely for any potential for impairment.

Our Customers

Fleetwood continues to take proactive measures to ensure the safety of its people and to sustain service to customers.

The Future

Management is focused on ensuring the business is prepared for opportunities that the post COVID-19 world will present.

Managing Director & CEO Brad Denison said “We are proud of our staff and contractors’ ability to implement social distancing and remote working requirements. Fleetwood is in an enviable position at this unprecedented time and we continue to pursue opportunities to grow the business organically and are also keeping a keen eye out for potential corporate transactions.”

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The market seemed to like it.  FWD were up +6% today, but at $1.76 they're still -23% lower than where they peaked over the past 12 months - at $2.29 on November 1st.  They are also +57% higher than the $1.12 they bottomed out at on March 25th.  I used to own FWD shares many moons ago, but I discovered that the board were looking after themselves and their management at the expense of their shareholders.  There were millions of dollars of free options handed out to business insiders, with either little or no hurdles.  On top of that, they ignored their caravans business during the last big mining boom, focussing instead on the lucrative mining accomodation construction sector, including building and managing remote area villages for FIFO workers.  And they then found themselves in trouble when the boom went bust and their "other" business, the caravans business had become loss making and consumers had lost interest in their Fleetwood, Coromal and Windsor caravans, most of which had not, at that time, had any major model upgrades or development work done in over a decade.  But that was then, and this is now, and Fleetwood have sold their caravans business, and are now a different company.  Or are they?  How much of that same board and management team remain, and are they still looking after themselves ahead of ordinary shareholders?  Don't know.  Don't follow them any more.  Have moved on.  Doesn't sound like it?  What do you mean?

May 2020?:  Moelis Australia:  Fleetwood Corporation Limited - Not Rated (Price: $1.65; TP: n/a)

This piece of research by Moelis appears to me to be undated, but was clearly prepared after FWD's March 30th "Update on impact from COVID-19" Announcement.  Moelis appear to have a bullish stance on FWD, despite having no rating on them and also not having any Target Price.

FWD have three divisions, the first being modular/transportable buildings, the second being their two accomodation villages in WA's north (Searipple and Osprey), and the third is their "RV Solutions" division which comprises Camec and Northern RV.  They used to build and sell caravans (Fleetwood RV, Windsor and Coromal brands), but they sold that loss-making caravan division to Apollo Tourism and Leisure (ASX: ATL) in mid-2018.  They sold it for just $1m, and forecast an overall loss of $15m on the deal at that time.

ATL were trading at over $1.50/share at that time, having peaked at $1.91 in January 2018.  They got down to just 7.5 cps (i.e. seven point five cents) on March 24th, but have climbed back up to close at 36 cps today (05-June-2020). 

FWD jumped +21% on that divestment announcement back in mid-2018, from $1.90 to $2.30, but closed today at $1.65.  They got down as low as $1.12 on March 25th, and recovered to $1.81 by last Wednesday (27th May, i.e. +62%), but are down -8.8% in the past 7 trading days. 

FWD have been a real capital killer for shareholders;  They peaked at $13.48/share back in January 2011 - and it's been a downhill slide ever since - punctuated with a handful of relief rallies before the SE trend resumed.  At $1.65, they are -88% below their January 2011 peak, and they've lost ground over 1 year, 3 years and 10 years.

Another company in the same space (modular and transportable buildings and structures) is Decmil Group (DCG) and their story is similar.  They peaked at $1.35/share in early March 2011, and they bottomed out at 4.3c (less than 5 cents per share) on April 3rd this year.  They closed today (05-June-2020) at 8.1c/share, being -94% below that March 2011 peak.  DCG have lost ground over 1, 3, 5 and 10 year periods.  Another capital killer.  Both have had poor management who looked after themselves before their shareholders and chased easy money over short time period while failing to plan for the longer term.  Both had trouble adjusting to the end of the last big mining boom when it tapered off in 2012 and 2013 (the bust after the boom). 

Decmil also went HEAVILY into the construction and management of accomodation villages for the mining and energy sectors, with Homeground Villages (who manage the Homeground Villages Gladstone Accomodation Village in Queensland) being a wholy owned division of Decmil (DCG).  Decmil have also built accommodation villages for others, as shown here on their website, including for mining and energy (oil/gas) companies, the Australian Government (Christmas Island and Manus Island Refugee Detention Centres, plus various schools and prisons), retirement villages, resorts, apartment complexes and rail camps. 

DCG announced on April 16th that they were going to immediately closed down their NZ operations after the NZ subsidiary suffered significant losses as a result of the termination of a major contract by the NZ Department of Corrections (“DoC”), following a dispute the parties have agreed to take to arbitration for financial settlement (but that DCG are clearly not confident about).  

On May 19th, DCG announced that Executive Director Dickie Dique (not related to Donald Duck) had been appointed Chief Executive Officer by the Board of Decmil, effective immediately, replacing Scott Criddle, son of Decmil's founder Denis Criddle.  Scott will remain with the business as an Executive Director.  They also updated the market on the pending sale of their Homeground business, including the Gladstone accomodation village.  They said, "Homeground remains on the market, sale discussions are underway and, to date, one firm offer has been received.  While sales discussions have commenced, falling oil prices and the COVID impact on tourism have led Decmil to re-assess the carrying value of the Homeground Gladstone accommodation village.  As a result of the review, the Decmil Board has adopted a conservative view of the asset’s carrying value and, supported by an external independent valuation, has revalued Homeground to $56.6 million.  This will crystallise a $28.8 million non-cash impairment in the current financial year." [i.e. FY20]
 
On May 14th, five days earlier, DCG had said in an announcement regarding their Banking Facilities, "NAB will maintain its current facilities and ongoing support for Decmil through to the end of January 2021, at which point Decmil expects to negotiate a fresh debt facility, preferably also with NAB.  In addition to the NAB facility, Decmil has also confirmed an agreement with the Company’s four surety bond providers that no cash call will be made on the bonds before 31 January 2021.  The effect of the combined agreements is to give Decmil operational certainty to continue moving the business back to strong profitability and to aggressively pursue new business opportunities, as well as enhanced optionality over capital opportunities."

Plenty of positive spin applied, however, they are currently unprofitable, so losing money, and their main bank (NAB) and other lending providers have all only agreed to support them for the next 7 months.

What I have learned from following companies who get themselves into these predicaments is that they tend to struggle to win a lot of new work because, understandably, companies don't want to award new contracts to companies who might not be around long enough to deliver on those contracts.  Strong companies with strong balance sheets and proven track records of on-time and on-budget delivery can often charge more and still win that work, because they are usually a safer option.  Nobody wants their builder to go bust halfway through the build.

That's not to say that Decmil (or Fleetwood) can't or won't win new work from here.  I'm sure they will win some more new work.  What I am saying is they now have multiple headwinds, and some of those are due in no small part to their own actions and decisions, or lack of.  Not all of the headwinds they now face are due to circumstances that were out of their control, or "acts of God".  Although some, like COVID-19, are.  But not all.

In Fleetwood's case they had seriously neglected their RV (Recreational Vehicles, i.e. Caravans and Campervans) division during the big mining boom, with Windsor and Coromal not having any serious upgrades (new models with new features) for about a decade, and so their market share had seriously declined over that time.  Because FWD had been making so much money out of building and running accomodation villages as well as building and supplying transportable (/modular) buildings to mining companies and mining services companies (they were regarded as a mining services company themselves at the time) they weren't focussed at all on their RV division, which had become very small by comparison with their building division.  When the mining boom went bust, and Fleetwood needed that diversity of income from their RV division, it had become loss-making for them, and the cost to resurrect their ailing RV/caravan brands was considered so great that they ended up offloading the whole division to ATL for just $1m to stem the bleeding.

Anyway, I digress...  Point is, Moelis think that FWD can stay FCF (free cashflow) positive under any of 3 different scenarios that they've looked at.  Seems to me that what Moelis is trying to establish is whether FWD can survive the current crisis, rather than whether they would make a suitable investment at these prices. 

I was a FWD shareholder about 10 years ago, but I have steered clear of them for most of the past 8 years, other than a couple of quick trades during their short-lived relief rallies.  Once I realised just how good their management were (i.e. not very good at all), they went from being "investment grade" to a trading stock for me.  

The lesson is that looking at where a company has traded previously gives very little in the way of a reliable indication of whether they might get back to those levels again in the future, or, if they do/can, how long it will take.  In the case of Fleetwood (FWD) and Decmil (DCG), neither are going back anywhere near their previous highs, ever again.  They just aren't the companies that the market thought they were back then, and they don't have the management, or the business plan, or the opportunities to make themselves great again.  IMO.

30-Aug-19:  From Moelis Australia:  http://research.moelis.com.au/ResearchPortal/DownLoad?E=bfjgkccbd