Treasure Chest | Jun 04 2020
How will the Australian federal and state government housing stimulus impact developers such as Stockland? Morgan Stanley assesses the proposals in the offing may provide a positive impetus.
-Residential enquiries rebound, yet will this translate to sales
-Auction clearance rates suggest housing is not out of the woods
-Are lower interest rates now less significant for residential developers?
By Eva Brocklehurst
Australia's governments are looking at ways to stimulate housing, with plans afoot for a new home buyer scheme and stamp duty reforms. What does this mean for companies like Stockland ((SGP)), which has a substantial residential development pipeline?
The mooted changes have been designed to help the construction industry but property developers such as Stockland are expected to benefit. Hence, Morgan Stanley takes a positive view and upgrades to Overweight from Equal-weight, based not only on the residential potential but also a stronger view of retail, as stores re-open faster than previously expected.
Whilst residential makes up only 40% of Stockland's earnings, the company's PE multiple has traditionally re-rated in line with the health of the residential market. Stockland sells land lots, which translates to profits within 6-12 months of contracts being exchanged. Morgan Stanley assumes residential settlements of 5000 lots in FY21 and 5400 in FY22.
Macquarie notes the company's positive commentary regarding residential enquiries in the last week of April but wonders whether this is partially attributable to pent-up demand and does not expect an immediate rebound in sales.
Stockland reported April defaults of 4%, better than expected, yet the broker expects an increase of around 5% in defaults over the rest of the year. As of April, Stockland had settled 3779 lots which would require an additional 1400 settlements in order to hit prior guidance of 5200 for FY20.
While not assessing government stimulus in particular, Citi suspects a residential downturn will still weigh on developer earnings. The broker expects Stockland to experience materially lower development earnings because of a combination of softer volumes, price and margins.
The broker has identified a relationship between auction clearance rates and residential volumes, with a sharp deterioration in clearance rates in recent months sending a negative signal for volumes as well. Citi reduces estimates for residential developers across the board by -15-20% to reflect this, as well as reduced contributions from other segments such as retail, office and industrial.
The broker acknowledges lower interest rates are a potential tailwind, or offset to the pandemic's impact on residential developers, but assesses the relationship between mortgage rates and house prices has weakened in recent years. This is attributed to changes in the availability of credit.
While housing finance data has been useful has an indicator for residential volumes the recent improvements are considered unlikely to reflect the full impact of the pandemic. That said, Citi remains of the view that fiscal stimulus could be supportive of residential developers.
The federal government is reported to be considering a new home buyer scheme, providing a $25,000 grant to any purchaser of a new building, as long as family income is less than $200,000 a year.
In terms of stamp duty reforms, NSW is potentially going to replace upfront stamp duty with an annual land tax. Morgan Stanley calculates this stimulus is more attractive for home purchases than the existing scheme which entails first home buyers only. Victoria is also considering the restructure of stamp duty.
Retailing is also not as bearish as Morgan Stanley anticipated. Around 85% of the company's tenants have now re-opened and foot traffic has returned to 80-100% of normal levels. Around 40% of Stockland's earnings come from the retail segment.
Morgan Stanley assesses the stock, based on historical discounts to the ASX 200 industrials ex banks, is currently cheap. The recent de-rating, the broker believes, has been driven in part by the expectation that the residential market will struggle. However the government stimulus is expected to lift earnings and result in a PE re-rating.
In contrast, Citi retains a Sell rating on Stockland, given the sharp recent rally, and believes the stock is not reflecting the cyclical headwinds for residential, or even the weaker outlook for retailing post the pandemic. The broker prefers Mirvac ((MGR)), given its high-quality diversified portfolio.
FNArena's database has three Buy ratings, two Hold and one Sell (Citi) for Stockland. The consensus target is $3.39, suggesting -8.5% downside to the last share price. The dividend yield on FY20 and FY21 consensus forecasts is 6.5% and 6.6%, respectively.
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