Mr Price or lifestyle property?
What a growth share should look like…
“KNOW, UNDERSTAND and even love and be proud of your investments” is one of the maxims that brilliant US investor Warren Buffett used for building up a fortune in his own lifetime. I couldn’t help thinking of that when I was standing in the middle of a beautiful lifestyle property development last weekend. That seems to be the definition of a high-density – also called Res 2 – property development where between 50 and 250 people are going to live, work and relax together in reasonably luxurious duettes on a small piece of land.
The price is R930 000 for a three-bedroom unit of 156sq m, including the garage. You need R10 000 to reserve a unit and, naturally, it was very tempting.
A quick calculation showed that you could perhaps let the unit for R4 500/month. Commission and the levy would take up at least R1 000 of that and the remaining R3 500 – R42 000/year – would guarantee an initial return of 4,5% for the first year. That’s far too little for a 100% mortgage, which would cost around R10 000/month.
The shortfall could be as much as R6 500/month, so it would be better to buy it for cash and regard it as a retirement investment. To justify that, the capital – or to put it differently, the price of the house – must grow by at least 10%/year over the next decade or so.
I then drove around the block to a new huge Mr Price Home store, which covers an entire 6 000sq m and “furnishes” the lifestyle duettes with the most wonderful furniture and accessories. Then I started wondering whether Mr Price shares wouldn’t perhaps be a better and more pleasant investment than the duettes.
Three weeks ago ( Finweek, 5 April), Mr Price was on my shortlist of the five best growth shares on the JSE. The group’s annual
report for the period to 31 March 2006 contains four graphs, which tell a fairy tale.
Turnover has increased from less than R100m to the current R5bn and the increase in dividend is much more than the best rental income that even the most enthusiastic investors in property could dream of.
The report also clearly plays a role in the group’s objectives for 2010. They’re simple and to the point: a doubling of turnover to R10bn and sustaining its current operating profit margin of 10%.
In brief, the two objectives tell that the 152c profit per share attained for the year to March 2006 could at least double for the year to March 2010. The dividend could also double: from the current 81c to at least 160c.
Things could go even better, because headline earnings and dividends usually increase faster than operating profit, as certain overheads are fixed.
Mr Price shares are currently trading at R30. That’s 10 times more than the price as recently as March 2001. However, that’s water under the bridge. At the current price of R30, the dividend of at least 160c/share for the year to March 2010 promises investors a cash return of 5,3%/year. That’s after tax.
To equal that the gross rental on the lifestyle duettes must be at least R10 000/month by 2010. And in that period nobody must have messed up the place or broken the toilet. Makes you think, doesn’t it?
The size of the Mr Price Home in Montana, Pretoria, is 6 000sq m. Similar shops have shot up in Hendrik Potgieter Avenue in Johannesburg and in Somerset West in the Cape.
The average size of the current 130 Mr Price Home shops is only 650sq m, but plans are to increase that to 940sq m by 2010. Yet it felt to me as if the huge shop in Montana was reasonably full of people on Sunday morning.
That’s the kind of blue-sky opportunity we were on the lookout for in our search for the ultimate growth share. It’s not always IT and new patent shares. The ordinary things around you can also be winners.
Yes, but you always buy houses with borrowed money, the supporters of investing in property will say. In fact, I only need R10 000 to buy a duette costing nearly R1m. All the appreciation on the R10 000 is earned. That’s true. But the R10 000 will also have to absorb the entire monthly income shortfall, plus the high cost of selling the property one day if prices perhaps bog down.