Balwin Properties BWN
December 19, 2018 - 6:50pm EST by
2018 2019
Price: 2.93 EPS 1.00 1.21
Shares Out. (in M): 470 P/E 2.9 2.4
Market Cap (in $M): 1,377 P/FCF 0 0
Net Debt (in $M): 1,192 EBIT 0 0
TEV (in $M): 2,569 TEV/EBIT 0 0

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  • Low multiple
  • Management Ownership
  • Underfollowed


Investment Overview: Balwin Properties is a 22-year old, JSE-listed, South African residential homebuilder with the highest profit margins of any worldwide builder, a demand tailwind, large multi-year pipeline and significant insider ownership. However, its stock is valued at only 2.7x trailing-12 month EPS,


Global homebuilders over time generally trade for 10-15x earnings, and 1-2x book value. Worldwide homebuilder valuations are currently depressed, but we believe this is temporary as valuations for homebuilders are well below historical averages. Balwin earns the highest ROE’s and gross margins of any global homebuilder we have seen; yet the business trades for less than 3x earnings and 0.6x book value. This is one of the least sensible valuations we have ever seen. If Balwin traded for only 10x trough earnings, it would be 230% higher than today's’ price.


The opportunity exists due to recent temporary slowing in Balwin’s growth and the location of the company in South Africa. We note that Balwin IPO’ed at 10x earnings, and its closest comp on the JSE, Calgro M3 Holdings, at one point traded for 20x earnings. So we believe a multiple greater than 10x for a homebuilder in South Africa is reasonable, and is supported by historical data.


We believe a resumption of growth aided by a recently announced rental partnership agreement (which will provide additional demand, while increasing earnings stability) should be a catalyst for a significant re-rating of the shares. We believe the multiple can re-rate back up to a P/E of 8x (still below its IPO valuation of 10x and worldwide comp’s), which on our estimate of $1.65 in near-term earnings power, would translate into a share price of ~R13-R16 /share vs. the current share price of ~R3/share, or a +4x increase. Thus, we believe the shares offer an asymmetric opportunity for value investors who look at out of favor industries and like to fish in less crowded ponds. Noteworthy, the South African stock market has been the best performing worldwide market over an extended period.


Note: All financial data are presented in Rand, unless otherwise indicated.


Company Overview: With roots dating back to 1996, Balwin Properties has established itself as one of the largest turnkey residential apartment development homebuilders in South Africa, with a portfolio of over 70 developments constructed or currently in development. The company was listed on the JSE in October 2015 at R10/share. Balwin’s focus is on the mid-market 1,2 & 3 bedroom apartments, with an ASP currently at ~R1 million (~$70,000 USD’s), on high density developments in the 4 largest metro areas (Johannesburg, Pretoria, Durban & Cape Town). Balwin has a growing pipeline, worth ~R40 billion, or over 14x the trailing-12 month revenues of R2.7 billion, which should support growth over the next decade. Based on our research and site visits, the company has established an excellent brand reputation as a high quality builder offering a lifestyle product at a value price. Helping to differentiate Balwin from smaller developers, the company’s new and larger developments all include “lifestyle centers”, which include a: swimming pool, gym, sports facilities, concierge and food & dining services. Additionally, the company has an exclusive license with Crystal Lagoons, to incorporate their unique lagoons in some of Balwin’s developments, further differentiating its product portfolio.


The following illustrate the company’s developments:


The following is a sample layout of one of its developments: