AMREP Stock: Share Price Falls But Margins and Balance Sheet Remain Strong (NYSE: AXR)

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Thesis

AMREP Company (NYSE: AXR) still remains undervalued due to its strong balance sheet (over $90M in land assets with less than $10M in debt with an EV of $43M). Despite the difficult economic climate, the balance sheet continues to grow and the margins continue to improve but remain underestimated. The stock is undervalued relative to its peers and has around 100% upside potential.

Introduction

AXR is a land development and home construction company with significant exposure in New Mexico. The company currently owns approximately 17,000 acres of land in New Mexico, where revenue streams come from the sale of developed and undeveloped land to homebuilders and developers. Therefore, undeveloped land is purchased bare of which AXR then obtains planning and approvals, installs utilities and adds infrastructure in order to sell as developed lots and obtain a price increase.

Share price

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The stock price this year has been jittery and has fallen with the market to about a 23% year-to-date decline.

Balance sheet and income statement analysis

AXR’s balance sheet is incredibly strong, where they are currently sitting on around 16 million in cash, implying that almost 40% of EV is made up of cash only. However, the most important element of the balance sheet is the current land holdings. The company is currently sitting on $64 million of undeveloped land. Residential construction represents an additional $4.5 million in assets. And despite the unfavorable environment, real estate assets on the balance sheet grew by 2% between April and July 2022.

Accounts

SECOND

This is interesting because one would generally think that in an environment where property prices have peaked either income will be constrained (since sales are not being made) or the balance sheet will shrink as assets are sold . However, in the 3 months ending July 22, $11 million in sales were made, 50% homes and 50% land.

Accounts

SECOND

A significant amount of land sales were made, approximately $5 million, while land on the balance sheet increased by $1 million, indicating that a significant margin is being made here. In terms of homes, sales were also around $5 million, but real estate assets on the balance sheet were only down -$130,000, implying a huge margin.

These results are driven by revenue metrics, where revenue per acre sold has historically increased in recent years on developed land, from approximately $300,000 per acre in 2014 to $450,000 per acre in 2021, representing an annual growth rate of 6%. However, in 2022 the land is currently being sold for $520,000 per acre, a 16% increase over the 2021 cost. Sales figures have improved significantly and the company says its gross margin on land increased from 31% in 2021 to 45% in 2022, and the gross margin of home sales increased from 16% to 25%.

However, given that the balance sheet has remained significantly robust and has not moved despite the strong sales, the gross margin is much higher than what is announced. The balance sheet holds assets that were carried at cost decades ago, so the assets are being sold at a price significantly higher than what is publicly available on the balance sheet, and we also know that the cash generated from these sales is discounts to develop more land.

Evaluation

Given a solid balance sheet and strong sales with high margins, the fall in the share price does not give it a fair valuation. The stock price has followed the rest of the market and investors are too focused on it being a development and home building company, and so as rates rise, valuations of these companies are expected to suffer given the decline in demand for mortgages. However, the current health of the company puts it in an ideal position to head into the current recession and emerge victorious. Margins improved significantly during a period when the share price fell, meaning gross margins of 31% and 16% in 2021 when the share price rose were considered as good margins, which implies that the margins we see today should be called good . The strong balance sheet gives the company a P/B of 0.7x (slightly above its peers) and the healthy sales give it an EV/EBITDA of 2, which is significantly lower than its peers.

Composition

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Given what has been discussed above, we know that the P/B of the AXR is higher than indicated. Although it is in line with its peers, it is below 1, which is too low considering its cost structure. On the other hand, the EV/EBITDA is clearly below average. Even if we exclude the 25 from FPH, the peer group EV/EBITDA is around 6x while the AXR is 2x. If we look at a brief sum of coin valuation, AXR would be best valued around its book value, implying 100% upside potential. However, if we were to look at EV/EBITDA comparisons, the upside would be closer to around 200%.

Risks

  • 99% of the current year’s built-up land sales were made to just four homebuilders. Due to the current economic climate of declining demand for mortgages due to rising rates, this concentration of customers is risky, as a drop in demand/sales from one customer can lead to a substantial drop in revenue.
  • The historic success has been on the development and sale of commercial real estate, which the company no longer has. Therefore, a shift towards residential real estate, in an environment where the base rate is expected to reach close to 5% next year, can be a bit risky.
  • Costs are expected to increase, not only due to increased tariffs, but also additional macroeconomic factors such as supply chain issues, material costs, labor costs and delays in approvals and therefore subsequent construction and sales. If these costs become more significant over the next 12 months (as expected), we could see these margins shrink.
  • Additionally, AXR is a microcap stock with very little coverage and volume, therefore a realization of its intrinsic value may not occur.

Conclusion

In conclusion, despite the fall of more than 20% of the AXR share price, the company is financially healthy with a solid balance sheet and strong business momentum. The economic environment is currently unfavorable, but margins have improved significantly over the past year. Based on the analysis, AXR’s stock price has more than 100% upside potential from current prices.

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