Australia | Jan 20 2011
This story features MIRVAC GROUP, and other companies. For more info SHARE ANALYSIS: MGR
By Chris Shaw
On the estimates of BA-Merrill Lynch, the Australian REIT sector is trading at an average discount to sector Price Objectives of 6.8% ex Westfield ((WDC)), and a discount to net asset value of 9.6%. The broker estimates the sector offers an average implied total return of 13.4%.
This suggests some value in the sector, a theme JP Morgan has looked at more closely in its sector review. For JP Morgan, the result has been a shift in bias for REITs trading at material discounts to book value as opposed to those that may be able to deliver positive earnings surprises.
In terms of stocks, this leads JP Morgan to favour domestic office exposures where the discounts to NTA (net tangible assets) are greatest, especially as there is the potential for a cyclical recovery in asset values over the next 12-18 months.
As this discount to book value reduces through 2011, JP Morgan expects total shareholder returns from those securities with greater discounts to NTA will be difficult to match for REITs more focused on earnings growth.
To reflect its sector review, JP Morgan has made a number of changes to its ratings in the sector. Overweight ratings are now applied to Mirvac Group ((MGR)), Dexus ((DXS)), Commonwealth Property Office ((CPA)), ING Office Fund ((IOF)) and FKP Property Group ((FKP)). Both Mirvac and Commonwealth Property Office have been upgraded, the former from Neutral and the latter from Underweight on relative valuation grounds.
JP Morgan is Neutral on Westfield ((WDC)), Stockland ((SGP)), Goodman Group ((GMG)), CFS Retail Property Group ((CFX)), Charter Hall Retail ((CQR)), Australand ((ALZ)) and GPT ((GPT)). CFS Retail has been upgraded from Underperform, while both Westfield and Charter Hall Retail have been downgraded from Overweight ratings, as has Tishman Speyer Office Trust ((TSO)).
Among its Underweight recommendations, JP Morgan has Westfield Retail ((WRT)), ING Industrial Fund ((IIF)) and Charter Hall Office ((CQO)), the latter two being downgraded from Neutral following rallies by both stocks in the final quarter of last year. Abacus Property ((ABP)) has also been downgraded to Underweight on relative value grounds, which compares to a previous Overweight rating.
In contrast, Deutsche Bank has Westfield Group as its preferred pick in the sector, reflecting its estimate the stock is trading at a discount to US peers. As well, Westfield offers positive operating catalysts, particularly through a recovery in its offshore operations.
Elsewhere in the sector, Deutsche also rates Westfield Retail ((WFT)) as a Buy, while it rates CFS Retail Property as a Hold. This reflects the broker's view that while Westfield Retail and CFS Retail trade at a similar discount to net asset value, CFS Retail has a higher development risk profile.
Following its recent listing coverage is picking up on Westfield Retail, the FNArena database showing a total of two Buy ratings, one Hold and one Sell with an average price target of $2.905.
Overall in the sector the FNArena database shows Sentiment Indicator readings among the large cap stocks in the sector of 0.8 for FKP, 0.4 for GPT, Mirvac, Goodman Group, ING Office, Australand, Charter Hall Office and Charter Hall Retail. Sentiment Indicator Readings of 0.3 apply to Stockland, Westfield Retail, Dexus and Commonwealth Property Office.
Citi has looked at the office sector from the point of view of efficiency gains, as energy efficiency information must now be provided when owners sell or lease space greater than 2,000 square metres. The broker notes larger REITs such as Commonwealth Property Office, Charter Hall Office, Dexus, GPT, Mirvac and Stockland have average portfolio ratings of 3.4 to 4.6 stars, well above the 2.0 to 4.4 stars average among smaller REITs.
The important element of this, according to Citi, is the cost savings that can be generated. The broker estimates energy efficiency can generate savings in electricity costs per star of around $2-5/square metre annually.
A higher star rating offers greater lease options, Citi noting the Australian government has stated a 4.5 star Energy policy target, meaning some companies such as Stockland are putting a priority on efficiency upgrades for assets with significant government leases.
For more info SHARE ANALYSIS: ABP - ABACUS PROPERTY GROUP
For more info SHARE ANALYSIS: CQR - CHARTER HALL RETAIL REIT
For more info SHARE ANALYSIS: DXS - DEXUS
For more info SHARE ANALYSIS: GMG - GOODMAN GROUP
For more info SHARE ANALYSIS: GPT - GPT GROUP
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: SGP - STOCKLAND
For more info SHARE ANALYSIS: TSO - TESORO RESOURCES LIMITED