While the debate about a housing bubble rages on in Australia, homebuilder Avjennings Ltd (ASX: AVJ) is making hay while the sun shines.
Shares in the company surged 3.1% to a two-month high of 67 cents after management upgraded its pre-tax profit guidance to be no less than $47 million for the year ended June 30, 2015.
This compares to its previous profit before tax guidance of "$40 million or higher" that it issued three months ago and the $27 million it posted in 2013-14.
The profit upgrade comes in spite of bad weather in its key market of New South Wales as AVJennings managed to complete more projects than anticipated in the last month of the 2014-15 financial year.
I suspect we are close to a 20% upgrade to consensus earnings per share forecasts for 2014-15, which would put the stock on an undemanding price-earnings (P/E) of around 7.7x.
As long as the wheels in the Australian housing market don't fall off, I think there could be a further 20%-30% upside for the stock given that Sydney and Melbourne are AVJennings' largest markets. The two cities are seen as the growth engine for Australian residential developments.
AVJennings has seven residential developments in New South Wales and six developments in Melbourne that will contribute to 2015-16 earnings.
More importantly, the builder has little exposure to Western Australia, which is seen to have the weakest outlook due to the slowdown in the mining sector.
What's more, the stock will also appeal to income investors as it is expected to generate a yield of over 8% for 2015-16 once franking credits are included.
But AVJennings isn't the only stock well placed to benefit from home construction growth in Sydney and Melbourne. Building supplies group CSR Limited (ASX: CSR) is another stock that I am bullish on as it trades at around a 20% discount to its peers.
The latest data from the Australian Bureau of Statistics also points to a good outlook for CSR, which supplies glass and bricks for construction projects. The price of glass in June is up 13% year-on-year while the price of bricks is 7% higher over the period.
CSR's key markets are also Sydney and Melbourne, and while the cloudy outlook for aluminum prices is dragging on sentiment, I believe the risks are more than reflected in the current share price as the stock has underperformed the market with a 2% dip since January.
