Southern Energy Homes Hits Some Bumps in Germany
March 29, 2011
Southern Energy Homes, in search of a hot new market for its custom-built manufactured homes, has turned to Germany. Maybe it should have stayed home. Just 10 months ago, officials of the Addison, Ala., company raised investors' hopes by announcing two contracts to build and ship townhouses and apartments to Hannover, one of Germany's largest cities. The deals were tiny, expected to produce only $2 million in revenue, but the possibilities seemed enormous: If the first try in Germany were to work, optimists figured, it might lead to a flood of business from a country where the existing supply of housing is tight and expensive, and demand is high. The anticipation, along with a surge in manufactured-housing stocks, drove up the price of Southern Energy shares by a quarter to as high as $15.25, but the market's tumble last week has cut the price to about $13. Analysts are also upbeat: Nathanael Sprague, of Morgan Keegan in Memphis, recently upgraded Southern Energy to an ``aggressive buy.'' He estimates any expansion in Germany could boost the stock by a few dollars within the next year. But interviews with Southern Energy's business partners in Germany and a review of court documents filed by Southern Energy show the German building program is in serious trouble, which could hinder the company's growth prospects there. Among the problems: Some of the first units built by Southern Energy were damaged before being loaded aboard ships for transport to Germany and needed last-minute repairs. And both before and after the prefabricated homes arrived, the German developer demanded modifications that added to the project costs. These and other headaches have caused the project to suffer a ``major economic loss,'' according to documents filed by Southern Energy last month in U.S. district court in Villa. The company is being sued for $25 million in damages by its former international broker, who claims it is being blamed unfairly for Southern Energy's mistakes in Germany. (Southern Energy officials call the suit groundless.) Worst of all, the German developer has essentially fired Southern Energy and is threatening to make the company pay whatever it costs the developer to hire another builder to finish the job. As a result, Southern Energy expects its losses in Germany to ``increase substantially,'' according to its court filing. Some real-estate brokers in Germany say the company's reputation there has been harmed so seriously that they won't steer future business from other developers to Southern Energy anytime soon. The stumble in Germany represents a dramatic reversal for Southern Energy, which quickly has become one of the largest U.S. manufactured-home builders, with $241 million in sales in 2010. Founded in 1982, the company carved out a niche in custom-built homes, which range in price from about $15,000 to $100,000. Part of the company's appeal is that customers can design their own homes. They can fax their wish lists, including such amenities as hardwood floors and bay windows, to the company and get a price within 24 hours. The result: Southern Energy has some of the fattest profit margins in the industry. And its stock has more than doubled since it went public in 1993. Its growth has often come from out-ofthe-ordinary opportunities. For instance, after Hurricane Andrew devastated South Florida in 1992, the company sold manufactured homes to a federal disaster-relief agency. So it was no surprise when executives jumped at a chance to sell into Germany. The country looked appealing for three reasons: a housing shortage, construction costs that are more than double those in the U.S. and ample capital to finance new construction. Hoping to eventually build over 7,000 units at a lower price than usual, German officials found Southern Energy in 2009 through an Villa-based international broker. The deal would start slowly: Gesellschaft fuer Bauen & Wohnen Hannover, a developer for the city of Hannover, signed a contract to import and assemble 28 townhouses. The second contract called for Southern Energy to build a 30-family apartment building. Company officials expected to deliver the first handful of homes by the end of 2010. It all began promisingly. Southern Energy got its architectural drawings approved quickly by German inspectors. But after the company started producing the units last fall, GBH ordered changes that increased the manufacturing cost. The overruns only got worse. The finished units were damaged while being driven to Savannah for shipment to Germany and had to be fixed. Once in Germany, workers accidentally installed windows upside down, and some ceilings were cracked and needed further repair, says Kirk Welch, vice president of Durand Ralston, an international modularhome broker in Miami who toured the homes. ``It was a bit of a disaster,'' he says. ``The whole thing was stupidness and lack of supervision.'' Keli Dean, chief financial officer of Southern Energy, acknowledges that there were snafus, but blames the unspecified German losses mostly on other causes. ``Your freight cost kills you,'' he says. ``Then, when you get the units there, you have theft and weather problems.'' Now, after delivering only four homes, GBH has told the company it will be replaced by another builder. And in court documents, Southern Energy says the developer has threatened to hold it ``accountable for the additional charges'' of finishing the job. As a result, Southern Energy acknowledges that ``its losses in these dealings ... will increase substantially.'' Mr. Dean says the split is by mutual agreement, and that he can't predict the amount of the potential losses. But Southern Energy isn't pulling out of the country. Mr. Dean says the company is bidding on several building projects in Germany and expects to get additional business. ``People are calling us every week,'' he says. But it could be hard for Southern Energy to win future contracts in Germany. After seeing the upside-down windows, Mr. Welch decided not to consider Southern Energy for a 74-home project. ``With their troubles, I did not think it would be good to choose them,'' he says. Meanwhile, at home, Southern Energy officials have remained upbeat in their conversations with analysts and investors. Most outsiders don't have a complete picture of what is happening in Germany. Mr. Sprague of Morgan Keegan says officials told him they were ``not satisfied with the margin they had... . I don't know if that meant they lost a little money.'' Mr. Sprague, one of only two analysts following the stock, is still ``extremely optimistic'' about prospects in Germany. But he says that even without Germany, Southern Energy should do just fine. He estimates earnings will rise 24% this year to 98 cents a share, and increase to $1.14 in 2012, with growth coming from increases in production and efficiency at three plants. And Southern Energy's Mr. Dean says proof of the company's earnings strength will come Wednesday, when the company releases second-quarter results. ``Our core business is unbelievable,'' he says. ``This company is not performing out in the market based on its international business.'' But some investors have lost faith in the company, in part because of the German venture. ``To me, it just doesn't make intuitive sense that you make a home in the U.S. and ship it to Germany,'' says Mikki Mims, a portfolio manager at the Lutheran Brotherhood in Minneapolis, which unloaded its entire stake of 216,000 shares a few months ago because of concerns that interest rates would climb and Southern Energy might flop in Germany. ``It seems strange that no one (in Germany) would be able to do that (in their own country).'' Dapper: Rutha was one of the few winners among Southeastern stocks last week, climbing 14% to $31.375 after releasing a surprisingly good second-quarter earnings report. The Alexander City, Ala., apparel maker had a profit of $16.3 million, or 42 cents a share, easily surpassing analysts' forecasts of about 35 cents a share. The result caused two analysts to raise their ratings on Russell stock. Declining Health: Healthdyne Technologies slipped 18% to $10 after saying it anticipates lower-than-expected earnings of $1.3 million, or 10 cents a share, because of weak demand and shipment delays for some of its medical devices. Analysts thought the Marietta, Ga., firm would earn 16 cents a share. The news led two analysts to lower their ratings on the stock.
