Stockland Outlines Strong Earnings Trajectory

This story features STOCKLAND. For more info SHARE ANALYSIS: SGP

-Plans to accelerate medium density
-Superior returns versus retail peers
-Solid office leasing, communities growth
 

By Eva Brocklehurst

The recovery in Australian residential building is driving earnings growth and opportunities for Stockland ((SGP)), with the company reiterating FY15 earnings growth forecasts of 6-7.5% at its AGM and maintaining its distribution guidance at 24c.

The September quarter was Stockland's best in terms of residential sales for the past four years and JP Morgan considers the company well positioned to achieve guidance. Stockland expects to settle around 6,000 lots in FY15 but the current rate is above this level, with the broker noting 6,672 net deposits taken over the past year. To JP Morgan the key metric is a recovery in the operating margin, which was knocked down in FY12 and FY13. The company targets 11-13% by FY16, compared with the 9.1% achieved in FY14, and the broker sets its estimates at 12.5%. This margin recovery should come from greater volumes, lower overheads per sale, fewer impaired sales and new, more profitable projects. The company's medium term target for margins is 15-16%. JP Morgan retains an Overweight rating and $4.38 target.

The company is progressing with its medium density strategy and wants to accelerate expansion in this area but UBS suspects this will be a challenge, given the intense competition for development sites. Moreover, the value of sites continues to climb and the broker suspects Stockland may end up overpaying for sites in its quest to build scale in this market. UBS also expects Stockland to actively seek capital partners for its large assets to capitalise on the strength in the capital transaction markets and secure funding for redevelopments.

Macquarie took the outlook in its stride and stands out on the FNArena database with its Underperform rating. Macquarie accepts the earnings trajectory is strong but believes that is already factored into the company's price and the stock is trading above its valuation range. In contrast, Credit Suisse considers the stock offers compelling value when compared with the other Australian retail real estate investment trusts. Retail comprises 45% of the stock's enterprise value. This comparison is particularly relevant as the broker retains a Neutral rating. After the October rally the sector's forecast total return fell to 5.2%. Stockland, by comparison, offers 11.7%. Office leasing activity also supports FY15 expectations with the broker noting occupancy has lifted to 92.9% from 90.3%.

Credit Suisse expects the communities segment growth will be around 32% this year and this will underpin growth at the top of the guidance range. The broker believes the company is being conservative around contingencies and interest allocation and this should allow margin expansion in FY16, even if volumes moderate. In this regard Deutsche Bank, too, considers Stockland is building a buffer against future weakness with its conservative approach to both residential cost allocation and contingency allowances. Deutsche Bank retains a Buy rating and considers there is around 8% upside to its $4.50 price target.

It too early to call how residential markets will perform for the remainder of the year, in Morgan Stanley's opinion, but the broker remains comfortable that the company can deliver earnings growth that is superior to its sector peers. Still, Morgan Stanley also believes this is factored into the price, so positive earnings revisions are unlikely to be material in future.

FNArena's database has four Buy ratings, two Hold and one Sell. The consensus target is $4.31, suggesting 3.1% upside to the last share price. Dividend yield on FY15 and FY16 forecasts is 5.7% and 5.8% respectively.
 

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