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Treasure Chest: GPT May Be Under Appreciated

Treasure Chest | Mar 05 2020

Has too much focus been placed on GPT's retail property portfolio when the industrial division weighting is increasing?

-Industrial/logistics to be a driver of medium-term earnings growth
-Will investors increasingly turn to those A-REITs with hard asset?s
-GPT well-positioned for any downturn in real asset values


By Eva Brocklehurst

Is property stock GPT ((GPT)) under appreciated? Goldman Sachs suggests this may be increasingly the case amidst the volatility caused by an environment of macro uncertainty. GPT has many established assets and may have been sidelined in favour of those that have greater leverage to the asset pricing cycle.

Credit Suisse is also inclined to believe too much focus may be placed on the retail portfolio and not enough on the commercial development, although suggests the stock is fairly valued. The re-weighting towards 20% industrial exposure is on track and the broker believes the development pipeline will be a driver of medium-term earnings growth.

While agreeing the market could be under appreciating the company's industrial/logistics segment and this will be a driver of growth, Morgan Stanley believes retail will remain a drag on the business in 2020 and Macquarie too, points out retail free cash flow was negative in the 2019 results.

The exposure to retail assets, 43% as of December 2019, could have affected investor sentiment, Goldman Sachs acknowledges, but assesses the stock has underperformed the sector over the last 12 months and all concerns are effectively priced in.

At the results, the company's development pipeline revealed $662m in office/logistics projects that are underway, helping to reduce the weighting to retail. GPT has strong growth in the office segment and strong occupancy in industrial provides a tailwind.

Yet, while reflecting on this point, Citi has highlighted weaker leasing conditions in retail are likely, and in offshore markets retail portfolios have persistently surprised to the downside.

Goldman Sachs' numbers show GPT offers a 12-month total return of 9% versus an average of 1% for the A-REITs (Australian Real Estate Investment Trusts) under coverage. The stock is currently trading on an FY21 free funds from operations (FFO) multiple of 16.3x which compares with the broker's A-REIT coverage average of 17.3x.

Hence, the rating is upgraded to Buy with a target of $5.97. Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, also finds there is little risk to distribution guidance for FY20, which implies a distribution yield of 4.7%.

Changing Tack?

Goldman Sachs expects the focus of investors will increasingly shift to the distinctions between A-REITs and to those such as GPT, where the underlying value of the real estate asset provides an anchor compared with those that are lighter on assets and higher on real estate funds management.

Moreover, there are some GPT assets that have a potential for change of use. One of these is a significant landholding adjacent to the Rouse Hill town centre (NSW). GPT is currently seeking approval for 2000 apartments and a 20,000 square metre commercial development.

Recent transactions and commentary from the A-REITs during reporting season suggests further upward moves in Australian commercial real estate values are expected and it remains too early to tell whether the recent retracement in equity market valuation will affect the pricing of real assets, Goldman Sachs points out.

Although a further step down in bond yields would provide an element of valuation support, this has been accompanied by a widening of credit spreads. This indicates an upward re-pricing of risk.

Regardless, if there is ultimately a decline in commercial real estate values Goldman Sachs believes GPT is well-positioned for such an environment. Gearing is below the company's target range of 25-35% at 22.1%. Moreover, the exposure to asset values is low.

FNArena's database has five Hold ratings and one Sell (Morgan Stanley) for GPT. The consensus target is $6.21, suggesting 4.5% upside to the last share price. The dividend yield on FY20 and FY20 forecasts is 4.6% and 4.8% respectively.

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