SELL Fleetwood

Fleetwood has just announced the sale of its loss-making caravan business, instantly restoring profitability for the group by closing a segment losing more than $10 million a year.

ASX-listed Apollo Leisure will acquire the Windsor and Coromal brands as well as inventory for the grand sum of $1 million and, in return, Fleetwood turns from a business making about $7 million a year in net profit to one making about $20 million a year.

Apart from caravans Fleetwood operates two core businesses: it leases out accommodation at its mining villages in Western Australia and it manufactures accommodation for the education and retirement sector. The mining bust had left Fleetwood with the loss-making caravan business. Aggregate profits crumbled to almost nothing and by 2016 it was recording EBIT losses. Last year, it made an after-tax profit of just $5 million.

Fortunately, the villages and accommodation businesses have flourished and offset the caravan cliff. Fleetwood hasn’t been a disaster but it hasn’t worked out as well as we had hoped.

The sale of caravans leaves the high-returning villages and a lumpy accommodation business that should generate pre-tax profit of about $20 million. That implies an enterprise value to EBIT multiple of about eight, which is about right for a business of this quality.

As a sanity check, we note that Fleetwood now trades in line with its tangible asset backing. We don’t think there is a mispricing here any longer. SELL.