Simonds Group goes back to basics in search of margin growth in homebuilding

One of Australia’s largest homebuilders Simonds Group (ASX: SIO) has provided an interim trading update for the upcoming end of the financial year in June this year with a healthy 2,500 new home starts and “strong margin growth” as the standout highlights.

Simonds Homes is a family-run business with almost 70 years of industry experience and has racked up over 21,000 new builds since its inception in 1949, by its original founder Gary Simonds.

Today, Simonds Group is currently one of Australia’s largest residential volume homebuilders with operations in Victoria, New South Wales, Queensland and South Australia.

The homebuilder said that profitability is continuing to improve following the execution of a “back to basics” business plan and forecast its earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of A$15.5 – $16.5 million in this financial year.

If confirmed in its final audited accounts to be published on 29 August 2018, the figure would represent a marked ~16% improvement compared to the previous year’s figure of A$13.8 million and a $4.4 million total in 2016.

Going back to basics

The heavy focus on simplifying its operations includes strengthening business rules, cost controls and shifting away from highly customised, low margin products. Overall, Simonds says it is “re-invigorating the home building business” and unlocking the significant potential at its disposal.

One of its more significant changes in the past year was the appointment of Mr Kelvin Ryan as new managing director and CEO in March, as a replacement of former chief Matthew Chun.

At the time of his appointment, Mr Ryan said that “the thing they need to get right is the balance between the wisdom and experience of a family-oriented building company with the wisdom and experience of external direction, profit strategy and governance.”

According to the interim results published today, Mr Ryan’s prognosis seems to have been on the money with Simonds recording improvements in several company metrics on a year-on-year comparison – whilst sustaining the company’s proud heritage and company culture.

“Kelvin Ryan possesses extensive experience in volume home building and has a strong track record in the industry. The Board holds high regard for his experience and skills as evidenced in his first 100’ days”, said Simonds board chairman Iain Kirkwood.

“He is leading the drive to cement Simonds strong brand in the volume home building business,” added Mr Kirkwood.

One of its other improvements this year has been to “substantially” improve its debt position over the past two years which Simonds says provides additional headroom for growth. Simonds reported that its cash exceeded drawn debt by $8 million compared to $5 million in 2017 and $8.1 million in 2016.

Today’s trading update helped Simonds to a 22% rally in early morning trade, with its shares reaching a high of $0.36 per share, thereby valuing the homebuilder at around A$52 million by market capitalisation.