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BALWIN PROPERTIES LIMITED - Voluntary business and trading update for the year ended 28 February 2019

Release Date: 14/03/2019 12:15
Code(s): BWN     PDF:  
 
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Voluntary business and trading update for the year ended 28 February 2019

Balwin Properties Limited
(Incorporated in the Republic of South Africa)
Registration number 2003/028851/06
Share code: BWN
ISIN: ZAE000209532
(“Balwin” or “the Company” or “the Group”)

VOLUNTARY BUSINESS AND TRADING UPDATE FOR THE YEAR ENDED 28 FEBRUARY 2019

HIGHLIGHTS
• Approximately 2 350 apartments sold and recognised in revenue in the current year (2018: 2 084
    apartments)
• Successfully achieved the objective of selling apartments to a strategic alliance partner
• Refinement of operational cash management showing results, with a healthy increase in cash on
    hand at year end

BUSINESS UPDATE
Balwin continued to experience strong demand for its lifestyle apartments for the year ended
28 February 2019, despite continued economic headwinds and sustained consumer pressure.
Significant management focus was placed on cash preservation in the current period and despite
continued delays experienced in the registration of apartments as a result of council delays, pleasing
positive cash flows are expected to be recorded for the year.

Approximately 2 350 apartments were sold and handed over during the reporting period (2018: 2 084
apartments) representing top-line growth of approximately 10%. This demonstrates the consistent
demand for Balwin’s high quality, affordable apartments and innovative lifestyle product offering to
the South African market. Approximately 1 000 apartments have been pre-sold for the 2020 financial
year and thus not recorded in revenue in the current financial year.

Demand for one- and two-bedroom apartments remained strong. As highlighted at the interim results
in October 2018, the Group proactively adapted its apartment mix and block configuration during the
year, introducing more affordable one-bedroom one-bathroom and two-bedroom, two-bathroom
apartments to satisfy the changing market demand.

Pursuant to the above, the current period’s revenue is expected to increase on a year-on-year
comparative basis, buoyed by stronger sales, albeit at a slightly lower average selling price than the
prior year. The VAT increase levied in the current year was absorbed into the Group’s selling price.

The initial phases of four new developments were handed over to customers in the current year,
namely at The Blyde (Tshwane East), The Reid (Sandton), The Jade (Somerset West) and Ballito Hills
(Ballito). Giving consideration to the total lifecycle of Balwin’s current development portfolio, the
majority of the existing projects remain at their earlier stages which traditionally return a lower
margin. The majority of the projects within the development portfolio have, however, matured over
the current year, and as a result the Group expects to record a marginal improvement in the gross
margin since the interim results presented.

Management maintains their expectation that the gross profit margin will improve as the current early
stage developments near completion. The business continues to target a gross profit margin of
approximately 35% through the entire lifecycle of a project, with typically higher margins being
achieved on Gauteng-based projects.
Cost management remains a priority area, with overhead costs being carefully monitored. Cash
management and capital allocation were key focus areas in the current year and management are
pleased to report that cash on hand improved to slightly in excess of R300 million at year end. Cash
management and cash utilisation remains a top priority for management for the forthcoming financial
year.

Management further remains committed to reviewing its development pipeline to ensure that the
existing pipeline is complimentary to its core business model.

SALES TO STRATEGIC ALLIANCE PARTNER
Balwin successfully implemented one of its strategic objectives of introducing a rental product to be
sold to a strategic alliance partner which is complimentary to the Group’s current build-to-sell model.
A new and separate business, named Balwin Rentals Pty Limited was incorporated in the current year
together with various strategic partners. Balwin hold a 25% shareholding in Balwin Rentals Pty Limited
from which it is expected to derive annuity income over time. Balwin successfully concluded the sale
of 252 residential rental apartments to Balwin Rentals Pty Limited for a total consideration of
R155,565,104 at an approximate gross margin of 30%. Additionally, Balwin entered into a right of first
refusal with Balwin Rentals Pty Limited in which Balwin Rentals hold the right to acquire 4 544
residential rental apartments on existing land parcels of Balwin. Balwin expects to deliver the rental
portfolio over a period of 6 to 8 years.

These apartments will retain Balwin’s quality and innovative design but are distinct from the
Company’s core business model, both in architecture and specification levels.

Lease rentals will range from R4 500 to R9 000 per month and provide tenants with access to unique
lifestyle features associated with the Balwin brand, such as a lifestyle centre, restaurants, gym and
concierge.

ANNUITY INCOME
In addition to the rental business, management remains committed to delivering annuity income to
its shareholders through revenue generated by fibre line rentals to internet service providers. Balwin
also has an existing partnership agreement for solar installations. Although contributions from annuity
income initiatives currently constitute a negligible portion of the total profits of the Group, it is
expected to increase substantially over the medium to long term.

Management remain alert to further annuity opportunities in partnership with leading providers that
are complimentary to the Group and enhance the lifestyle offering to its customers.

OUTLOOK
Notwithstanding robust demand for Balwin’s lifestyle products, the Board remains concerned over
macro-economic growth, interest rates and policy uncertainty. In this context, and as advised at the
interim results in October 2018, the Board continues to place a greater emphasis on cash preservation,
a more focused allocation of capital and cost containment, especially given the early stage nature and
infrastructure requirements of a number of developments.

TRADING UPDATE
The following disclosure is made in accordance with Section 3.4(b) of the JSE Limited’s Listings
Requirements:

    -   Consolidated earnings per share and headline earnings per share for the twelve months ended
        28 February 2019 are expected to decrease by between 5.35% and 9.99% over the prior
        financial year, translating into a decrease from last year’s 104.56 cents to a range of between
        94.11 and 98.97 cents per share.

It is expected that Balwin will release its results for the year ended 28 February 2019 on or about 15
May 2019.

CORPORATE OVERVIEW
Balwin is a specialist national large-scale residential property developer focused on the turnkey
development and sale of sectional-title apartments as well as surrounding infrastructure, in the low-
to-middle market segment.

Estates typically consist of between 500 and 1 500 sectional title residential apartments and are
located in high-density, high-growth nodes across key metropolitan areas in Johannesburg, Tshwane,
the Western Cape and KwaZulu-Natal. Apartments range in size from 33m2 to 120m2 and are priced
from R599 900 to R1 999 900 per apartment (including modern fitted kitchen appliances) within the
classic operating model.

Balwin’s current strategy rests on four key elements:

• Core business
The core business focuses on providing a quality product to the low-to-middle income market at an
affordable price. Balwin benefits from economies of scale, in-house construction and management
whilst retaining flexibility throughout individual phases of large developments.

• Balwin Elite model developments
On existing land holdings in select nodes, where higher selling prices can be achieved (R1 999 900 to
R2 999 900). The Elite model developments are built to higher specifications but follow the same
phase-by-phase development structure as all Balwin developments. Management do not intend on
continuing the Elite model developments and will phase these out once the existing developments are
completed.

• Sales to strategic alliance partner
Balwin will develop apartments to sell to a strategic alliance partner in line with the existing proven
model of a phase-by-phase approach. These apartments have a distinctive architecture that is
different to Balwin’s core business model, yet will remain synonymous with Balwin quality and
innovative design.

• Annuity income
The Group continuously explores opportunities to leverage its existing asset base and all-inclusive
service offering. Annuity income opportunities such as partnerships on solar energy solutions and fibre
infrastructure within the Balwin estates and the rental business have been initiated during the year.
The annuity business will be complementary to Balwin’s current business model as well as enhance
the lifestyle offering to its customers, with limited additional construction costs required in order to
generate annuity returns.

The information contained in this business and trading update have not been reviewed or reported
on by the Group’s auditors.

Bedfordview
14 March 2019
Sponsor: Investec Bank Limited

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