Is There Value In Australia’s LPT Sector?

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By Chris Shaw

After last month’s Australian reporting season, brokers have engaged in sectoral analyses to determine how things stand in various parts of the market. The listed property sector in particular has come in for significant scrutiny given the difficult conditions that have been created by the subprime crisis and the resultant impact on global credit markets.

In its summary of the sector, Austock Securities suggests there is a disconnect between prices in the sector and fundamentals, with the two prevailing conditions being uncertainty and investor disappointment. The broker’s sector call as a result is a Hold, as while the recent easing in official interest rates by the Reserve Bank of Australia (RBA) is a step in the right direction with respect to lowering funding costs, it sees few positive catalysts in the medium-term.

One positive it has taken from reporting season is the move by many trusts to return to aligning distributions to cash earnings, while the broker also sees scope for some value to be unlocked by a de-stapling of some securities going forward.

But offsetting this is the potential for more write-downs in asset values, especially from managers that to date haven’t been particularly aggressive in addressing this issue. Two it points out here are Charter Hall ((CHC)) and Valad Property Group ((VPG)). There also remains the issue of where fresh capital will come from, as while lower distributions are a good start, there remains the likelihood of selective asset sales in its view.

GSJB Were is also of the view a cautious approach in the near-term is justified as some downside risk remains, but longer-term there are a number of potential positive triggers that could again drive valuations higher. These include strong asset pricing, an improvement in the availability and cost of funds, a rebound in Australia’s residential fundamentals and more aggressive action by the RBA than is currently expected with respect to rate cuts. In the broker’s view, it would take a sustained combination of these to trigger an uptrend

In the longer-term, Austock takes the view the sector’s underlying fundamentals remain positive and this means at some point in time investor interest will return to the sector, but where the buying emerges will be the key in terms of generating returns.

Among the stocks the broker covers it retains a preference for the Australian based players, as on its analysis those with overseas interests appear to have models that are under more stress in the current financial environment. This leaves it with Buy ratings on Abacus Property Group ((ABP)), Aspen Group ((APZ)) and Macquarie Leisure ((MLE)) and Holds on Australian Education Trust ((AEU)), APN/UKA European Retail Property Group ((AEZ)) and Bunnings Warehouse Property Trust ((BWP)).

The broker notes Abacus is a Buy as the group is under no stress to sell assets and in fact has acquisition capacity of $200-$250 million, which leaves it well positioned to acquire attractive assets at good prices in current tough conditions. While Aspen’s funds management operations may see a slowing in momentum in this market, the broker sees no problem with its growth model, especially as new funds should continue to add to earnings.

Macquarie Leisure looks well placed to benefit from the easing in discretionary spending pressures as interest rates come down, in Austock’s view, while it too has growth options from its Goodlife and Main Event divisions.

JP Morgan has also looked at the sector but taken a slightly different approach in attempting to identify the stocks with the best mix of free cash flow yields, solid underlying fundamentals, unstressed balance sheets and are trading at a discount to net asset value.

Among the larger capitalisation stocks, the broker’s pick from this screening process is Stockland ((SGP)), as the group’s Australian-only trust continues to enjoy strong net operating income growth. With the stock is well placed relative to the sector in its view, the broker has upgraded to an Overweight rating from Neutral previously.

With respect to other larger names in the sector, the broker points out many screen poorly, these including GPT ((GPT)), Macquarie Countrywide ((MCW)), ING Office Fund ((IOF)) and Macquarie Office Trust ((MOF)). This means none of them are particularly cheap at present, with the broker preferring to stand back until there is greater clarity on how they will deal with upcoming debt expiries.

Elsewhere in the sector the broker doesn’t see Westfield ((WDC)) as particularly cheap although it points out the company does have one major positive in that its balance sheet remains in very good shape relative to the sector as a whole.

Others such as Challenger Diversified Property Group ((CDI)), Babcock & Brown Japan Property Trust ((BJT)) and Galileo Japan Trust ((GJT)) appear to offer a reasonable risk/reward trade off having been sold down heavily, while also scoring reasonably well in the broker’s view was Valad. Overall, the broker suggests the sector is fully priced at present.

With respect to how the broader market views these stocks, among those with at least four ratings in the FNArena database, Stockland scores two Buys, one Accumulate, five holds and one Sell, Westfield is rated as Buy four times, Hold four times and Sell once (JP Morgan), Macquarie Leisure scores five Buys and one Hold and Bunnings is rated as Buy and Sell once each and Hold twice.

GPT scores one Buy and one Accumulate, four Holds and three Sell recommendations, Macquarie Countrywide is rated as Buy three times, Accumulate once, Hold four times and Sell once, ING Office is rated as Buy once, Hold four times, Reduce once and Sell twice, Macquarie Office is a Buy twice and a Hold six times and Babcock & Brown Japan is rated as Buy and Hold twice each.

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