Strong Yield Underpins Stockland

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Stockland has reaffirmed FY18 guidance after a firm March quarter in which retail sales growth picked up and residential sales eased.

-Sales growth improved in all categories of retail in the March quarter
-Company removes target for 7% returns in retirement division
-New residential releases skewed to June quarter, recovery expected
 

By Eva Brocklehurst

Residential conditions have moderated for Stockland ((SGP)) while the retail segment surprised on the positive side in the March quarter. The company has re-affirmed its FY18 guidance for distributions of 26.5c per security, growth in free funds from operations (FFO) at 5-6.5% and around 6,500 residential settlements.

Ord Minnett observes a solid quarter and finds a pick-up in retail sales encouraging, while the residential sales slowdown was expected. Retail sales growth was the best in two years while quarterly residential sales rates were the lowest since 2012, affected by low numbers of lot releases which the company had previously signalled.

Slow sales conversions continued, as expected, in the retirement business. Macquarie expects a step-up in residential earnings to be supplemented by lower debt costs which should offset a reduction in retirement earnings.

The broker was not surprised that management has advised that its target of 7% returns in retirement by FY19 will not be achieved. Retirement conditions remain subdued but brokers note this is a relatively small contribution to overall earnings.

Deutsche Bank retains a Buy rating based on an assumed 18% in upside to the current share price and the strong distribution yield relative to peers. Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, also rates the stock Buy, with a target of $4.74, and remains attracted to the strong balance sheet and diversified business model.

Acknowledging the FY19 FFO multiple of 11x is not demanding, UBS envisages earnings risks remain to the downside. The broker suggests recent announcements by APRA indicate a more rapid tightening of lending standards.

In a credit tightening scenario, where borrowing capacity is reduced and house price growth deteriorates below its base case, the broker envisages downside for Stockland of -5% in FY20 and -8% in FY21.

Retail

Looking towards FY19, Shaw and Partners believes a key driver of the growth outlook is incremental income from completed retail developments. Sales growth improved in all categories of retail including specialties in the March quarter. The company highlighted specialty sales growth of 3.0% since December, at the same time that occupancy costs have declined.

Despite investors being somewhat negative towards the retail portfolio, Shaw and Partners finds the improvement in sales metrics encouraging. The broker highlights the fact that Stockland has minimal exposure to department stores.

The company has sold the Highlands neighbourhood centre for $43m on an exit yield of 5.4% and at a 20% premium to book value. Ord Minnett believes the retail portfolio would be better placed if it could sell seven assets, totalling $820m or 11% of the retail portfolio.

The company has indicated it may look at joint venture capital for some of its larger assets, as is the case with Townsville and Shellharbour. Ord Minnett asserts Stockland could potentially package some of the lower quality assets with stakes in larger and better-performing assets.

Macquarie also suggests asset sale proceeds could fund capital management initiatives such as a share buyback.

Residential

Residential sales were down -14% quarter on quarter and down -29% year on year, affected by releases. New releases are skewed to the fourth quarter and should mean a recovery in volumes. The company remains positive about the outlook for residential, despite net deposits being down -24%.

UBS notes the latter was explained by the moderating of project releases in Sydney and the timing of new launches in Melbourne and Brisbane. Cancelled contracts remain below the long-term average rate at 11%.

Ord Minnett observes price growth has flattened in NSW and demand has eased slightly. The broker believes the residential margin has potential to surprise on the upside over the next 18 months, from growth in land prices in Melbourne along with the release of high margin projects in Sydney.

FNArena's database shows three Buy and three Hold ratings. The consensus target is $4.47, suggesting 7.3% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 6.4% and 6.7% respectively.

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