Modular Construction Adoption Will Open New Market Opportunities

Key Takeaways

• Modular construction acceptance and strategic efficiencies could boost Fleetwood's revenue and net margins in housing markets.
  
• Growth in Building Solutions and strong Community Solutions performance underpin revenue and earnings potential.
  
• Economic pressures and high input costs threaten Fleetwood's revenue and margins, while reliance on competitive modular construction could impact long-term sustainability.

Catalysts

Engages in the design, manufacture, sale, and installation of modular accommodation and buildings in Australia and New Zealand.

• The development and acceptance of modular construction, particularly in key worker and social housing markets, could enhance Fleetwood's revenue opportunities, as they leverage their national manufacturing footprint. Improved efficiencies and strategic procurement initiatives are expected to support increased net margins.
  
• Building Solutions' return to profitability, coupled with a significant increase in their order book, positions the segment for sustained revenue growth. The transformation and growth of this segment may further lead to improved earnings performance over the long term.
  
• The strong performance and occupancy rates in Community Solutions, particularly in regions expecting extensive development projects, provide a foundation for high revenue and EBIT growth, benefiting overall earnings.
  
• The launch and commercialization of the Glyde technology platform present opportunities for increased revenue and enhanced ESG offerings, potentially yielding higher margins and improved shareholder returns.
  
• Fleetwood's transformations, including the ERP system upgrades and exploring high-demand aftermarket RV products, suggest potential for sustained profitability and revenue growth in the struggling RV Solutions sector, contributing to overall earnings enhancement.

Fleetwood Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fleetwood's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 5.4% in 3 years time.
• Analysts expect earnings to reach A$26.4 million (and earnings per share of A$0.21) by about February 2028, up from A$3.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$33 million in earnings, and the most bearish expecting A$19.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 50.6x today. This future PE is lower than the current PE for the AU Consumer Durables industry at 35.1x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Fleetwood Future Earnings Per Share Growth

Risks

• The RV Solutions segment has been negatively impacted by cost of living pressures, leading to reduced consumer spending on discretionary items, which could further pressure revenue if macroeconomic conditions do not improve.
  
• Building Solutions faces lingering execution risks from previous project delays in key approvals, which could adversely affect revenue growth and future profitability.
  
• The shift to high input costs in the RV market, without the ability to fully pass these costs on to customers, directly impacts gross margins and could continue to compress net earnings if not addressed.
  
• Exposure to economic conditions in specific regions like Karratha, which affect occupancy at accommodation villages like Searipple, poses a risk to revenue streams if regional demand decreases or projects are delayed.
  
• The company’s focus on modular construction and diversification into sectors such as social housing and key worker accommodation is subject to competitive pressures and reliance on securing and executing government contracts, affecting long-term revenue sustainability.

Valuation

• The analysts have a consensus price target of A$2.335 for Fleetwood based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$486.7 million, earnings will come to A$26.4 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$2.05, the analyst price target of A$2.34 is 12.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.