Gateway Lifestyle Group (ASX:GTY) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. It’s crucial to understand if a company has a strong future based on its current operations and financial status.
Firstly, a quick intro on the company – Gateway Lifestyle Group operates in the manufactured home estates sector in Australia. Started in 2009, it operates in Australia and is recently valued at AU$596.70M.
The first thing that struck me was the pessimistic outlook for GTY. A consensus of 5 AU real estate management and development analysts covering the stock indicates that its revenue level is expected to decline by -6.21% by 2021, negatively impacting earnings, with an upcoming bottom-line growth rate expectation of -20.90%. With top line and bottom line expected to decline over the next couple of years, there is high uncertainty around the sustainability of its current operations.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether GTY is a risky investment or not. Alarm bells rang in my head when I saw GTY’s low level of cash generated from its core operating activities. Given its debt level is relatively minimal (12.27% of equity), the fact that GTY’s cash only covers a mere 12.27% of debt makes me worry. However, management has been able to reduce debt over the past five years, and it generates enough earnings to cover annual interest payments. There’s room for improvement on the cash management side of things, but its overall debt level and interest coverage somwehat alleviates my doubts around the sustainability of the business going forward. Although GTY has high near term liquidity, with short term assets (cash and other liquid assets) covering upcoming one-year liabilities, it is not enough to cover longer term liabilities. This is not a big concern, though something we should be aware of. One reason I do like GTY as a business is its low level of fixed assets on its balance sheet (3.11% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. GTY has virtually no fixed assets, which minimizes its downside risk.
GTY currently trades at AU$1.98 per share. At 302.13 million shares, that’s a AU$596.70M market cap – which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 56.06% (source: analyst consensus). With an upcoming 2018 free cash flow figure of -AU$500.00K, the target price for GTY is AU$0.89. This means the stock is currently trading at a massive premium. However, comparing GTY’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 9.83x vs. the industry average of 12.61x.
A good company is reflected in its financials, and for GTY, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.