The report for Melcor Developments is updated for Q1 results and rated Buy at $13.40. Single family home building in Alberta has declined significantly and therefore Melcor sold 46% fewer building lots in Q1 compared to Q1 of the prior year.
In addition, no lots were sold in the U.S. as those sales tend to be done in larger blocks and do not occur every quarter. They are actively developing lots in the U.S. for sale later this year.
Melcor reported a significant decline in earnings in Q1 and that seems likely to be the case for the full year 2019. Lot sales in Canada will almost certainly decline. Offsetting this, they are developing more property in Alberta this year which has been a reliable source of profits. And U.S. lot sales could be higher. The market value of their investment rental buildings has recently been holding up well but there could be some declines due to moderately higher vacancies rates.
So, the near-term earnings outlook is certainly negative.
But meanwhile the shares trade at just 42% of book value and the book value consists of raw land, developed land, finished building lots and income (rental) properties that appear to be worth at least their stated book value. That would appear to provide a strong margin of safety.
Unfortunately, it appears that even more patience will be required for those holding this investment.
Ultimately, Melcor’s share price over the next few years will depend on whether the province can continue to grow leading to a rebound in single family home construction and increased demand for its office and retail rental space. There has been over-building in the office segment which will hold down lease rates and occupancy levels for some years. Despite a lot of gloom in Alberta, its real GDP grew 2.4% in 2018 and the population grew 1.7%. The unemployment rate has declined from a high of 9.1% in 2016 to 6.7% as of the April report. And the price of Western Canadian Select has improved sharply in the past six months to about the $50 level. Hopefully there will be progress on the pipelines including an expected federal cabinet approval of the TransMountain pipeline in June. That and the more business-friendly polocies of the new conservative government could certainly increase the optimism levels.
Overall, Melcor looks attractive based on its large discount to book value, but the stock is not without risk of languishing or declining.
The report for the Melcor REIT is also updated for Q1.