Tag Archives: Property and Infrastructure

article 3 months old

Australian Listed Real Estate Tables

PDF file attached.

Investors looking to diversify away from straight equity can invest in property as an alternative via direct investment, or by investing in units of listed or unlisted real estate investment trusts (REIT) or the shares of property developers.

Typically a REIT will purchase a number of similar properties, maintain those properties and collect rent from tenants, and pay a distribution (dividend) to the unit holder net of maintenance costs and management fees. REITs are primarily attractive to investors for their dividend yield but also offer capital upside on property value appreciation. The bulk of listed REITs fall into three property categories: office, being office blocks usually in a CBD; retail, being shops and shopping centres; and industrial, being warehouses, logistics centres and so forth. Other variations exist.

Property developers typically purchase land, build office, retail, industrial or residential complexes, and sell those properties. Developers offer a higher risk/reward investment than REITs given the lag time between construction and sale, and the capital committed to a project. Dividend yields are typically lower but capital up/downside typically greater.

The tables in the attached PDF list Australian REITs and developers and and calculations for dividend yield and valuation, including share price to earnings, price to net asset value (market value of property) and price to book value (property valuation on the company's/trust's books) for the purpose of investor assessment.
 

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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article 3 months old

Australian Listed Real Estate Tables

PDF file attached.

Investors looking to diversify away from straight equity can invest in property as an alternative via direct investment, or by investing in units of listed or unlisted real estate investment trusts (REIT) or the shares of property developers.

Typically a REIT will purchase a number of similar properties, maintain those properties and collect rent from tenants, and pay a distribution (dividend) to the unit holder net of maintenance costs and management fees. REITs are primarily attractive to investors for their dividend yield but also offer capital upside on property value appreciation. The bulk of listed REITs fall into three property categories: office, being office blocks usually in a CBD; retail, being shops and shopping centres; and industrial, being warehouses, logistics centres and so forth. Other variations exist.

Property developers typically purchase land, build office, retail, industrial or residential complexes, and sell those properties. Developers offer a higher risk/reward investment than REITs given the lag time between construction and sale, and the capital committed to a project. Dividend yields are typically lower but capital up/downside typically greater.

The tables in the attached PDF list Australian REITs and developers and and calculations for dividend yield and valuation, including share price to earnings, price to net asset value (market value of property) and price to book value (property valuation on the company's/trust's books) for the purpose of investor assessment.
 

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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article 3 months old

Downside Still In Play For A-REITs

By Michael Gable 

It was a week to remember and we have to think back to the GFC to see such a wild ride in markets. Our downside target for the S&P/ASX 200 Index was reached, but blink and you would have missed it. Until Trump gave his speech, it looked like we would have a few days down in the market, giving us plenty of time to close off the defensive stance and buy the dip.

The consensus view was that an unlikely Trump victory would see the market sold off and gold rally, but it only lasted a few hours and now the market is doing the opposite of what was expected. It can be put down initially to a sheer sense of relief that the election is over and we can feel more comfortable putting money back into the market. Then the other ramifications start to become obvious. Trump will have control of both the Senate and Congress which means he can push through his policies that will ultimately give GDP a boost. Bonds have accelerated their sell-off and rates will have to rise at a quicker rate to contain Trump's inflation-boosting policies.

Infrastructure stocks will look good, along with cyclicals, banks, and quality resources (although the big names are too hot in the short term and have seen massive shorts build up on the register). Gold has taken a hit recently but investors still remain wary of a few issues and we should see it recover somewhat from here, but we've had to scale back our upside view. Property trusts and proxy-bonds will be the losers over the next year.

With the last six months being tough for investors and fund managers with Brexit and the US election to worry about, we see the market feeling a bit more relieved and looking to plough idle cash back into the markets. This means that the following six months, with the above roadmap of what sectors to look for, could present some great opportunities to make money in the share market.

One sector particularly hard hit of late has been Australian real estate investment trusts (A-REIT), as measured by the XPJ index.
 


The rise in yields is having a very obvious effect on the listed property sector. The uptrend broke a few weeks ago and price action remains very weak, with the XPJ failing to rally last week like most other sectors. We can see obvious support levels near 1165, which is a 38.2% retracement of the 2009-2016 rally. If that cannot hold, then the 50% level comes into play down near 1050.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Jobs, Retail, Real Estate Listings, NBN And Equity Strategy

Employment numbers; consumer spending; slot manufacturers; real estate listings slowing; momentum in NBN share; is it too early to ditch yield stocks?

-Lower housing turnover foreshadowing weaker spending growth, Credit Suisse believes
-Aristocrat seen increasing share in North America, Ainsworth subdued
-Soft listings likely to have adverse impact on REA and Domain
-Telstra enjoying solid gains in NBN share, Vocus accelerating
-Bond yields unlikely to rise much and Deutsche Bank still values yield stocks

 

By Eva Brocklehurst

Employment

Commonwealth Bank analysts have examined monthly changes in employment, which show that annual employment growth has been propped up by two very big increases in October and November 2015. According to the Australian Bureau of Statistics, employment lifted by 49,000 in October and 65,000 in November. These very large monthly changes were both two standard deviation events, the analysts note.

While concerns abated about the reliability of the data with the passage of time, the analysts are reminded that these are now about to drop out of the annual calculations. They expect the annual pace of employment growth to slow to just 0.7% in November from 1.4% in September.

Such an outcome is expected to mean analysts and policy makers focus a little more on the pace of jobs growth and what this is likely to signal for output, inflation and rates.

Retail Consumption

Credit Suisse suggests, from its observations, that retail spending has stalled heading into the end of year despite official data that points to growth in labour income and solid gains in house prices. The broker believes the official data overstates the strength of the labour and housing markets and stagnation in consumer spending is consistent with an alternative view.

The broker observes a drop-off in housing turnover, even abstracting what is happening in house prices. Lower turnover foreshadows weaker spending growth, even if house prices do not fall. Credit Suisse suggests the Reserve Bank of Australia should pay more attention to the state of consumer spending. This is because the consumer still accounts for around 60% of GDP.

The broker's leading indicators point to slower spending growth in the foreseeable future, in part because labour and housing market conditions are softer than the official data suggests but also because turnover in housing is dropping away. Hence, Credit Suisse believes the RBA will need to cut rates further.

Slot Manufacturers

From a survey of the North American slot machine market in the September quarter, UBS notes that Aristocrat Leisure ((ALL)) added 815 leased games. The survey indicated that Aristocrat achieved 27% ship share in the quarter. This was 11% above its trailing 12-month ship share.

Ainsworth Game Technology ((AGI)) achieved 2.3% ship share in the quarter, 3% below its 12-month trailing average, which compares with 7% in the prior quarter based on the survey. The survey is consistent with the broker's view that Aristocrat is increasing its share in North America and provides further confirmation for Ainsworth's update regarding its soft quarter in the US.

Real Estate Listings

New listings in the national property market declined 3% in October, a slowing from the flat levels observed in September. This indicates a weak start to the second quarter and Deutsche Bank expects a continuation of this soft listing environment will have a further adverse impact on both REA Group ((REA)) and Fairfax Media's ((FXJ)) Domain. The broker lowers forecasts and price targets for both stocks to take this into account.

New listings growth in the capital cities was slightly lower than the national numbers, with Sydney continuing to show the most significant decline, down 16%. Melbourne was down 4%. The broker acknowledges this may simply be a reflection of a low point in the volume cycle rather than because of any structural factors.

UBS also notes a post-election rebound in residential new listing volumes still has not eventuated. This means there is downside risk to this broker's estimates for REA. Relative weakness in Sydney and Melbourne may impact overall yields for REA, given the higher absolute prices of depth products in these markets.

NBN & Telcos

From its observation of ACCC data, UBS gauges Telstra ((TLS)) continues to enjoy solid gains, with its share in the September quarter helped by the acceleration of the FTTN roll out. Vocus Communications' ((VOC)) share of NBN market growth is accelerating and UBS believes this reflects a strong portion of industry additions. As the company's NBN subscriber base builds, reducing churn will become an increasingly important driver of share growth, in the broker's view.

Shaw & Partners notes Telstra is defending its market share aggressively, adding 61% of NBN subscribers in the September quarter versus its market share of around 47%. Vocus is also doing well, the broker observes, adding 11.3% of subscribers versus its market share of around 7%. TPG Telecom's ((TPM)) quarterly additions are below its natural market share, the broker notes, although it is doing well in metro areas.

Goldman Sachs agrees that Telstra is growing its overall NBN share, now considered to be over 50%, while Vocus is building momentum. The broker highlights the fact that the latter's overall share is continuing to increase despite the company not looking to actively migrate existing subscribers to the NBN.

The broker also notes a relatively soft subscriber performance from TPG Telecom, offset by improved plan mix. Goldman believes up-selling to high-speed plans is important for the company's profitability in an NBN world. That said, TPG's iiNet looks to have had a soft quarter, with TPG's share in Western Australia declining by around 115 basis points to 38%.

Equity Strategy

Deutsche Bank believes it is too early to ditch yield stocks even though these have come under pressure in the past three months, coinciding with the rise in bond yields. The broker is not convinced yield stocks will fall further and believes it is appropriate to include a selection of these in portfolios.

The broker's US strategist highlights the still-substantial gap between dividend yields and bond yields. A hike to the US Federal Reserve's funds rates in December is considered likely, but the broker does not believe this automatically means bond yields should move higher.

In 2004 bond yields barely moved when the US Fed was raising rates, weighed down by a glut in global savings. Now the broker observes there is a glut of central bank liquidity. Money is leaving Europe and going to the US, which can keep a lid on long rates.

The broker notes a divergence with Australia, as the US Fed seeks to hike rates while the RBA is likely to cut. Deutsche Bank also detects some recent softening in the Australian economy, slower growth across retail sales, hours worked and credit. The broker does not envisage bond yields rising much, removing a catalyst for more under performance.

Yield stocks may even trade a little rich, given their scarcity value in offering a decent real yield. The broker's portfolio has a selection of Stockland ((SGP)), Telstra, Sydney Airport ((SYD)) and APA Group ((APA)).


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article 3 months old

Weekly Broker Wrap: Coal Economy, Telcos, Food And Infrastructure

CPI outlook; Oz economy and coal prices; telcos under an NBN; Ardent Leisure; food inflation; big infrastructure projects.

-Perceptions the RBA's easing cycle is over are misplaced in Macquarie's, Morgan Stanley's view
-Coal price spike sets Australia up for possible trade surplus
-Trading multiples seen unwinding for telcos as the benefits of structural tailwinds dissipate 
-Sugar price rises spearheading likely inflation in some packaged grocery
-Goldman Sachs considers Lend Lease well placed for new major infrastructure projects

 

By Eva Brocklehurst

Macro Outlook

Australia's headline consumer price index (CPI) in the September quarter was better than Macquarie expected and the outcome removes the trigger for a November cut to the Reserve Bank's cash rate. That said, perceptions that the potential inflection point evident in the headline CPI could mean the easing cycle is over are misplaced in the broker's view.

For its outlook on the cash rate to be derailed, Macquarie believes inflation prospects need to be boosted to the point where the central bank is concerned about containing a sharp break-out in inflation. Morgan Stanley also envisages little change in the low inflation trend.

Core measures of inflation edged down to 1.5% year on year, leaving room for further cuts to official rates in the broker's opinion, if the labour market weakens over 2017. Morgan Stanley expects the slowdown in the housing cycle will impact growth and the labour market over 2017 and into 2018, ultimately prompting the RBA to lower rates another 50 basis points to 1.00% in the second half.

The broker highlights the risk of a hard landing within apartment construction and argues that a broad downturn in housing would put up to 200,000 jobs at risk and mean unemployment would rise to 6.5%.

Oz Economy And Coal

Cuts to coal supply in China have meant coal prices have surged. Initial contracts for hard coking prices spiked by 116% in the June quarter to US$200 and spot prices rose another 20% to around US$240. Thermal spot and semi-soft contract prices also rebounded around 50%.

Together, coal prices, weighted by Australia's export share, have more than doubled and UBS observes this spike adds around $3bn per month to export values. The broker suspects the country's trade deficit will probably disappear in coming months, and may even turn to surplus.

If the price spike is sustained through the December quarter, total export prices are likely to rise around 5%, quarter on quarter. Assuming broadly flat import prices, it would also mean the terms of trade turn up 5%. Hence, even with some retracement of coal prices next year, nominal GDP appears set to grow 5% in 2017.

At face value, the spike in coal prices is a positive for government budgets but the broker's channel checks suggest the Commonwealth's MYEFO (mid year economic and fiscal outlook) will largely look through the price hike, given the May budget already projected nominal GDP of 4.25% in 2016/17 and 5% from 2017/18 onwards.

Telcos

The easy money has been made in tier 2 telcos over the last ten years, Morgans asserts, as the sector has enjoyed structural tailwinds and the benefits of many acquisitions. More diverse companies, combined with low interest rates and strong earnings growth, have resulted in trading multiples virtually doubling from long-term averages of 6 to 12 times enterprise value/EBITDA (earnings before interest, tax, depreciation and amortisation).

This is now unwinding and the broker expects while Telstra ((TLS)) has never re-rated and it has most to lose under the National Broadband Network, it remains well hedged against this loss. The stock is considered relatively safe and holding up with respect to NBN market share.

Morgans expects TPG Telecom ((TPM)) could de-rate further, as unlike Telstra it is not compensated for NBN losses. The company needs to either double its consumer customer numbers, grow corporate share or reduce costs from iiNet.

Vocus Communications ((VOC)) has de-rated and now looks interesting to the broker. There is little risk to NBN earnings as the company already pays the higher access prices. Still, Morgans suspects investors will want to witness the integration of recent acquisitions and the cash flowing before revisiting the stock.

All the above three carry Hold ratings from the broker. Morgans prefers global satellite re-seller Speedcast International ((SDA)) in the sector, rating it Add, as it has a much larger addressable market and therefore a substantially longer pathway for growth.

Ardent Leisure

The Dreamworld fun park has been closed until further notice after four fatalities at the site. Theme parks previously represented 33% of Ardent Leisure's ((AAD)) FY16 group EBITDA  excluding health clubs, Citi observes.

The broker invokes lessons from the UK where Merlin had an accident in its Alton Towers park in June 2015 at the start of its peak trading season. There were two serious injuries but no fatalities. The principal cost to the group was a fine of GBP5 million. Citi calculates that attendance fell 20-30% at the park following the incident and the share price has now recovered to levels at which it was trading prior to the incident.

Based on the Merlin experience, Dreamworld attendance is expected to be adversely impacted over the upcoming peak Christmas period. Revised forecasts assume Dreamworld continues to trade but at lower attendances over FY17, and maintenance capex increases over the short term.

FY17 and FY18 EBIT (earnings before interest and tax) forecasts fall by 27% and 18%, respectively. The broker requires more clarity surrounding the cause of the incident and the duration of the park closure before returning to a Buy recommendation, and downgrades to Neutral.

Food

The Australian supermarket sector has languished with industry growth of 3.2% over the past year but Citi believes low inflation will not last forever and fresh produce inflation is likely to rise. In 2017, some packaged grocery categories could also experience higher inflation.

Using wholesale data, banana prices were up 25% on the east coast and potatoes, tomatoes and lettuce have seen inflation of 18-52%. Fresh produce is about 10% of supermarket sales and recent inflation could add 1.0-1.5% to industry sales growth in the September quarter.

While there is clearly more supermarket competition with Aldi's growth and profile, Citi assesses most of the low inflation is a reflection of lower raw material prices. Many packaged groceries have experienced deflation such as in beverages, bakery and cereals, pet food and toiletries. However, the basket of soft commodities in these products is starting to rise, the broker observes, particularly for sugar. Sugar prices are up 85% for September 2016.

Infrastructure

Goldman Sachs updates its infrastructure construction tracker to reflect the latest high priority projects and also for the recent awards of rail rolling stock contracts. The broker now estimates a pipeline of over $38bn in major infrastructure projects. From a top down perspective, a 3.4% compound growth rate in infrastructure construction investment is estimated over 2016-19.

Four mega projects underpin the pipeline, these being the Sydney metro rail city & south west phase, the Melbourne metro rail tunnel, the WestConnex (Sydney) and Western Distributor (Melbourne) road projects. These four represent 90% of the project pipeline and are due to be awarded in late 2017.

The broker notes Lend Lease ((LLC)) and Cimic ((CIM)) have the capability to participate as equity investors in public-private partnerships, which have been increasingly deployed in Australian infrastructure projects. Lend Lease has won 40% of the $5bn of projects awarded since the start of 2016, compared to its 12% market share in 2015.

This compares favourably to Cimic, where market share declined to 30% in 2016 from 73% in 2015. Goldman Sachs expects the recent momentum in market share will underpin growth in Lend Lease's Australian construction business.


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article 3 months old

Settlement Risk Still Live For Mirvac

Mirvac has signalled a strong performance across its business segments but brokers disagree as to the extent of income risk from apartment settlement defaults.

-Strong exposure to NSW, the state with the best fundamentals across asset classes
-Rising trend in defaults and longer settlement periods from foreign buyers
-Slowing pre-sales momentum observed in projects such as Yarra's Edge Tower 10

 

By Eva Brocklehurst

Mirvac ((MGR)) has maintained FY17 guidance and signalled its business is performing solidly with little income risk. The company has re-affirmed FY17 earnings of 14.0-14.4c and distributions of 10.2-10.4c per security. A target of over 15% return on invested capital is maintained.

Mirvac settled 667 residential lots in the September quarter, around 20% of its FY17 target and 17% above the prior corresponding quarter. Apartment pre-sales reached another record high, at $3.0bn, which is attributed to strong sales at its St Leonards apartment project in Sydney. Valuations at Melbourne's Docklands are coming in around 3–5% below sale price while valuations have been largely in line at Newstead in Brisbane. Both these projects are due for settlement in FY17 and will remain a key focus for brokers.

UBS considers the stock is cheap, upgrading to Buy on valuation and designating Mirvac as a preferred A-REIT (Australian Real Estate Investment Trust) exposure. The business is set for multi-year growth in the broker's opinion, as it has the greatest exposure to NSW, the state with the best fundamentals across asset classes, namely retail, office, residential and industrial.

Moreover, the company has high exposure to the Sydney office market where vacancies are trending below 5%, and a blue-chip apartment pipeline where profitability is now emerging. The company does have the highest cost base in the sector, the broker acknowledges, lacking scale in its retail portfolio and this is expected to be difficult to overcome quickly without a large acquisition.

Apartment settlements are forecast to peak in FY20 while the recycling program of non-core retail and office assets is coming to an end. UBS believes the impact of apartment cancellations is small, even when assuming unprecedented settlement risks exists in problem markets like Brisbane and Melbourne.

Ord Minnett maintains doubts about settlements in the wake of tougher rules on lending and foreign ownership and prefers a Hold rating. The company did flag the fact that default rates sit slightly above historical averages of 1% but also highlighted that all defaulted lots marketed for sale have been re-sold. Mirvac acknowledged it continues to experience settlement delays from foreign buyers.

To Ord Minnett, the company's comments neither confirm nor deny a major settlement problem but rather suggest it is too early to be confident the issue has passed. Foreign purchases are envisaged taking longer to settle, as obtaining finance remains a major problem, while domestic purchases become an issue for settlement if bank valuations come in below purchase prices.

Morgan Stanley also queries whether the settlement risk has passed. While the re-selling of the apartments could provide some investors with the confidence they need, others may focus on the rising trend in defaults and longer settlement periods from foreign buyers. Furthermore, slowing pre-sales momentum in some projects are a concern, such as Yarra's Edge Tower 10, which recorded zero sales in the first quarter, although downside risk to guidance appears limited at this point, the broker asserts.

The rest of the Mirvac’s business is envisaged performing solidly with minimal income risk. Occupancy in the office portfolio has edged down to 95.2% in September and Macquarie suspects there is room to capture upside from improving office markets without being too exposed. In retail, occupancy has increased slightly in the quarter to 99.7% while occupancy in the industrial portfolio remains high at 99.7%.

Macquarie expects earnings in FY17 will be underpinned by the settlement of some high- margin projects such as Tullamore, Harold Park precinct 4A, Bondi and Green Square and believes the stock continues to offer exposure to a resilient residential market and an improving Sydney office market. With earnings growth of 10% marked out for the next two years, Macquarie retains an Outperform rating.

FNArena's database has three Buy and three Hold for Mirvac. The consensus target is $2.26, suggesting 8.2% upside to the last share price. Targets range from $2.20 (Morgan Stanley) to $2.30 (Credit Suisse). The distribution yield on FY17 and FY18 forecasts is 5.1% and 5.2% respectively.
 

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article 3 months old

Cimic Bid For UGL Unmasks Uncertainties

Contractor Cimic has made a takeover offer for engineering services company, UGL. Brokers are lukewarm about the prospect, suggesting areas of uncertainty exist.

-Ongoing uncertainty with UGL's Ichthys liabilities
-Less compelling strategically for Cimic, Morgan Stanley believes
-Downside risks still exist for Cimic as well

 

By Eva Brocklehurst

Infrastructure and mining contractor Cimic ((CIM)) has made a takeover offer for engineering services company, UGL ((UGL)), believing the acquisition will complement its own business or enhance capabilities in new areas.

Cimic has acquired a 13.84% stake in UGL, via its subsidiary CG12, and made an offer for the remainder at $3.15 cash per share. The company, if successful, intends to conduct a strategic review of the UGL business. The two companies have worked jointly on the Airportlink project and Cimic's John Holland and UGL are partners in Metro Trains Melbourne.

Deutsche Bank calculates the transaction would be 8-13% accretive to earnings per share in FY17-20 but neutral to cash flow because of the costs associated with the Ichthys project, noting the bid price implies $150m in Ichthys cost claims are recovered. The broker believes UGL offers attractive end market exposure with 71% of revenue recurring and 68% in non-resources business.

There is little overlap currently between the two competencies, although UGL has previously acted as a sub-contractor to Cimic in electricals and signals and there may be cost savings for Cimic by not having to pay sub-contractor margins in future work of this nature.

At the time of writing the broker notes UGL was trading above the offer price which implies the market is attributing some probability to a competitive bid. Deutsche Bank considers a counter bid by a trade player unlikely, although private equity could offer up to $3.78 and still generate a reasonable internal rate of return (19%).

At the current offer price Deutsche Bank calculates an IRR of 22% based on current UGL forecasts but is inclined to make no changes until the UGL board responds to the offer. Meanwhile, the risks for Cimic are considered to the upside with strong growth in Australian infrastructure.

The transaction looks accretive for Cimic on Citi's calculations. The broker finds it curious that given the well documented issues regarding the troubles with the Ichthys project, the bidder's statement from Cimic indicated it has not had access to the UGL records, or other internal resources, and therefore no due diligence has been undertaken, despite the offer being made unconditionally. Given the large premium in the bid and ongoing uncertainty regarding Ichthys the broker believes it highly uncertain whether the board could obtain a higher offer.

Morgan Stanley calculates that ignoring any underlying cash generation in the second half, the transaction would move Cimic to a net debt position of $400m as of 2016. If successful, the broker estimates the acquisition would be neutral to slightly accretive to FY16 earnings per share for Cimic and, potentially, mid to high single digit accretive in FY17. While in terms of accretion the proposed transaction could be attractive the broker does not find the bid so compelling strategically for Cimic.

The broker would have expected that Cimic is capable of moving into at least some of the areas in which UGL operates without having to take over the business. Moreover, UGL has material exposure to passenger rail manufacture in which Cimic has no experience.

The other issue is the potentially uncapped liability for the CCPP (combined cycle power plant) and SMP (structural, mechanical and piping) contracts that UGL holds at Ichthys, for which $375m in provisions have already been taken. Morgan Stanley observes so far UGL has failed in its efforts to contain these costs, which may signal further downside risk to the earnings profile and cash flow.

For Cimic, Morgan Stanley assigns the smallest weight to its bull case, given the significant downside risks envisaged, including unresolved legacy issues and non-sustainable components of reported earnings as well as the capital structure.

FNArena's database has three Sell ratings on Cimic, with a consensus target of $18.44 that suggests 32.8% in downside to the last share price. Targets range from $12.40 (Morgan Stanley) to $23.20 (Deutsche Bank). For UGL, the database has one Buy (Deutsche Bank), two Hold and one Sell (Ord Minnett, yet to comment on the bid). The consensus target is $2.38, suggesting 26.0% downside to the last share price. Targets range from $1.94 (Ord Minnett) to $3.15 (Citi).
 

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article 3 months old

Uncertainty Grips Estia Health

Aged care provider Estia Health has downgraded FY17 guidance and flagged the potential divestment of non-core assets. Brokers remain cautious about the sector.

-Guidance downgrade stems from lower growth rates in occupancy, higher non-labour expense
-Brokers diverge over amount of risk that remains on the balance sheet
-Uncertainty prevails over federal government's planned cuts to funding

 

By Eva Brocklehurst

Estia Health ((EHE)) has appraised the market of its intention to review options around several non-core assets while re-setting its FY17 guidance lower. Brokers are cautious about the aged care sector as a whole, given the federal government flagged a tightening of regulation in its budget and there is substantial development work entailed.

No operator as yet has provided an assessment of the expected earnings impact from the federal government's proposed cuts to its funding instrument, expected to affect earnings in FY18-19. The government is reviewing the current funding environment, with potential policy changes expected in late 2017.

Estia has downgraded its FY17 EBITDA (earnings before interest, tax, depreciation and amortisation) forecast by 15-20% from guidance released back in August. Now guidance is $86-90m, the downgrade stemming from lower growth rates in occupancy and higher non-labour expenses versus budget. The asset replacement contribution fee has been axed and $15m in shares will be offered to the Kennedy family under the dividend reinvestment plan, providing proceeds for working capital.

Moelis observes management remains reticent about quantifying the earnings impact from government funding changes. The broker reduces earnings per share estimates by 25% for FY17 and 13% for FY18. The company has a substantial debt load and Moelis is wary of the risks in integrating the $700m or more in acquisitions since 2015. The broker, not one of the eight monitored daily on the FNArena database, maintains a Hold rating and $3.01 target.

Projections for growth have been re-set to what appear to UBS to be very conservative levels. The company is reviewing its costs and ways to mitigate the government funding cuts and UBS believes a new base has been set, with high conviction regarding this being achieved. Moreover, the broker believes management has now passed the most difficult period in terms of cash flow and balance sheet risk.

UBS reduces estimates to align with the new guidance but continues to believe around 11.2% as a 3-year forward compound growth rate is plausible. UBS does not believe there is substantial financial risk associated with the refundable accommodation deposits (RAD) as, while government changes to the framework in July 2014 caused some movement in resident preference, subsequently the mix has settled. The broker doubts shifts in resident preferences will cause risks to the balance sheet.

UBS asserts that the market should be thinking about the growth opportunity in aged care in terms of internal rates of return (IRR), which are far more instructive as a measure of value. This, in the broker's view, suggests that acquisitions provide better shareholder value versus developments in terms of non-organic growth.

The strategic review has already identified several non-core assets that may be divested to reduce costs. Macquarie suggests this strategy could include underperforming facilities which do not fit into the network and/or a number of greenfield sites which appear to have been shelved. The broker also warns that this review could result in future write-downs, with around $715m in goodwill likely to be scrutinised.

Along with the additional money from the Kennedy family, the company should have around $70m in working capital to fund requirements and upcoming dividend payments. The broker notes that based on the revised guidance and updated debt levels, net debt to EBITDA (ex bonds) will likely exceed 3.5 times in FY17.

Despite the guidance downgrade, Macquarie believes the company is heading in the right direction as it re-sets expectations and cleans up some of its accounting practices. Still, with uncertainty prevailing over government funding the broker sticks with a Neutral rating.

Morgan Stanley has decided the guidance re-set and lack of certainty is a case to downgrade the stock to Underweight. A lower sustainable margin and less ability in the balance sheet to cope with regulatory changes underpin the downgrade.

The database has one Buy, one Hold and one Sell for Estia Health. The dividend yield on FY17 and FY18 forecasts is 7.5% and 6.7% respectively.
 

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article 3 months old

Goodman Heading Lower


Bottom Line 05/10/16

Daily Trend: Neutral
WeeklyTrend: Down
Monthly Trend: Up
Support Levels: $6.84 - $6.65 / $6.38
Resistance Levels: $7.35 - $7.44 /  $14.50

Technical Discussion

Goodman Group ((GMG)) is an Australia based integrated commercial and industrial property group. The Company is engaged in investing in industrial property, fund management, property services and property development, including development management. It owns, develops and manages real estate, including warehouses, logistics facilities, industrial estates, business parks and offices globally. It also offers property solutions for various industries, such as logistics, pharmaceutical, automotive, e-retail and retail. For the year ending the 30th of June 2016 revenues increased 45% to A$1.71B. Net income increased 6% to A$1.27B. Net income was partially offset by net gain from fair value adjustments on decrease of 36% to A$327.8M (income) and Interest expense from third party loans. Broker consensus is “Hold”. The dividend yield is 3.3%.
 
Reasons to be bullish (caution short-term):
→ It’s been a strong start to the year for FY17 providing some certainty in regard to earnings
→ Under geared balance sheet presents opportunity.
→ Benefitting from the structural shift to e-commerce by consumers & retailers
→ A strong balance sheet offers scope to choose inexpensive developments
→ Geographical diversity
→ Earnings and distribution growth remains
 
It’s been a solid trend higher since 2009 for GMG with price tending to spurt higher before embarking on long drawn-out consolidation phases. Not that there is anything wrong with this type of price action but patience is definitely required with this stock. However, recovery highs have continued to be exceeded and longer term there’s no reason why this trait can’t continue. However, it now appears that a deeper retracement needs to unfold before the prior uptrend reignites. The reason being, that the movement down off the late August high has been impulsive in nature which should not complete the whole corrective pattern. The recent pivot high also terminated in the typical retracement zone as annotated with the leg higher also unfolding in 3-waves meaning the pattern is likely corrective.
 
Volume often provides a clue and it’s very evident here that it increased significantly during the prior leg down whilst declining substantially during the recent rally. Again this adds weight to the case for lower prices over the coming weeks. The wave equality projection is down at $6.38 which interestingly enough sits at the exact same level as the 61.8% retracement zone of the whole movement higher that commenced in September 2015. This provides an area of confluence and increases the chances that it’s going to be significant. Bigger picture, a larger corrective pattern down to that aforementioned level would be deemed as being extremely bullish and provide a buying opportunity.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Where Are The Buying Opportunities In A-REITs?

This story was first published for subscribers on September 12 and is now open for general readership.


For those wanting to partake in A-REIT investment brokers take a look at where the buying opportunities lie, given recent under performance of the sector.

-Increasingly expensive relative to equities but distribution yield spread to long bonds still appeals
-Residential valuations less compelling and cycle may be close to the peak
-Office portfolios considered well positioned in current environment
-Slowing retail sales a headwind for that sub sector

 

By Eva Brocklehurst

After the reporting season, the performance of Australian Real Estate Investment Trusts (A-REITs) is likely to be driven by macro factors and Morgan Stanley considers there are none more important than the trajectory of US interest rates, as relative performance is highly correlated. Expectations for a lift in US rates have driven the underperformance of the sector recently. Pull-backs in February and late March proved to be buying opportunities and the broker mulls whether the current situation provides another chance.

While the sector may struggle against rising rate expectations, for those wanting to partake in sector investment Morgan Stanley favours stocks with a growth bias, such as Goodman Group ((GMG)), Lend Lease ((LLC)), Stockland ((SGP)), and Westfield ((WFD)), preferring these in relative terms to Scentre Group ((SCG)), Mirvac ((MGR)) and Charter Hall Group ((CHC)).

Office-exposed A-REITs are preferred over retail and the active managers of assets over passive. Decreasing price momentum and downgrades to distributions for several passive A-REITs, particularly those with lower-quality assets, could lead to further under performance, Morgan Stanley believes.

Specifically, while Westfield is testing investor patience, the broker continues to believe 2016 will represent a trough in the earnings cycle and growth can be driven by US$1.2bn in 2017 development completions. Morgan Stanley suspects any overweight positioning in Scentre Group is at risk. Goodman Group's development pipeline also allows it to be a net seller of assets during cyclical peaks.

Morgan Stanley retains an Attractive industry view but observes the risks are in a rising bond yields, positive earnings momentum for industrial stocks and material tightening in credit conditions. In residential sub-sectors there is still a sweet spot across the board, but the broker prefers Stockland to Mirvac because of the clarity in the outlook,with a record level of net deposits.

In residential segments, Goldman Sachs believes FY17 settlement risk is overstated and, while volumes and margins are strong, the house price outlook is more mixed and construction approvals are flattening. This suggests to the broker that the cycle is close to a peak and pre-sales growth is likely to slow.

UBS, too, considers residential valuations are less compelling now, but Mirvac appears the cheapest in terms of the implied value for its development business. Mirvac is the broker's preferred of the large caps, with its NSW and office exposure and implied multiples for development business.

UBS continues to believe Australian property is attractive on a global basis, as its yields versus bonds are wider than average compared with other developed markets. Investors may have increased their exposure to A-REITs over the past nine months, but the broker does not consider the sector a crowded overweight realm.

The broker is surprised by the robust outlook for the office market and envisages 11% and 19% upside to estimates for Dexus Property ((DXS)) and Investa Office ((IOF)), respectively, over the medium term. Outside of the A and B grade Sydney assets, Goldman Sachs expects office segment operating income growth will be modest.

In terms of spot bond rates, A-REITs appears reasonably priced on most traditional valuation measures, Credit Suisse suggests. Post a reporting season that was underwhelming, the broker retains just three large cap Outperform ratings: Scentre Group, Westfield and Lend Lease. Credit Suisse observes the gap between high and low productivity assets was evident in the results, with sales for GPT Group ((GPT)), Mirvac and Scentre Group outperforming peers.

The broker continues to view Investa Office and Mirvac's office portfolios as best positioned in the current environment. Credit Suisse also finds the earnings quality questionable generally, with office A-REITs the largest beneficiaries of the expiry of incentives on leases being below that of replacement leases.

On of the more interesting items in the reports was the announcement by BWP Trust ((BWP)), that Bunnings will vacate up to seven of the 81 properties in the trust to move to newly acquired stores and developments.

Credit Suisse has argued that over the long term, tighter cap rates – the ratio of asset value to producing income -- lead to lower rents for generic real estate as developers undercut existing rents. This is now playing out in those asset classes with short development time frames. Credit Suisse notes the only asset class where the replacement cost maths does not hold up is in high quality malls.

In light of the strong FY16 performance, the sector looks increasingly expensive to the broker, relative to Australian equities. The sector's prospective distribution yield of 4.6% compares to an historical average of 6.4% but in the current environment a 270 basis point distribution yield spread to long bonds remains appealing, for the near term at least.

The highlight of profit season for Ord Minnett was the strength in residential, with both Stockland and Mirvac reporting higher sales and expanding margins. The broker, too, notes Sydney office incentives have declined and monetising this in terms of better income growth is challenging.

All five major retail landlords reported slowing specialty sales growth. Balance sheets are in good shape, gearing is low and there is plenty of investment capacity but acquisitions remain very competitive, Ord Minnett observes, so deploying capacity may prove challenging and begin to weigh on earnings growth.

The season highlighted a stark contrast in earnings/cash flow growth, with developers and fund managers typically growing the fastest, and the passive rent collectors missing out, Macquarie observes. Non-core asset sale programs may be okay in the longer term for Vicinity Centres ((VCX)) and Charter Hall Retail ((CQR)) but modest net operating income growth combined with more static debt costs and dilutive asset sales can be a hindrance.

The broker observes the backdrop is strong for fund managers such as Goodman and Charter Hall, while Lend Lease has an attractive profile at a reasonable valuation. The retail bond proxies, such as Vicinity Centres and Scentre Group, are expensive in Macquarie's opinion, offering limited upside risk to earnings. Aventus Retail Property ((AVN)) is a preference in terms of its tenant base. Westfield is considered expensive and translating lost earnings from dilutive asset sales into accretive developments will take time, in the broker's view.

UBS has moderated its outlook for the retail A-REITs, suspecting the global trend of retailers swapping large formats for small at lower rents is only starting to occur and additional capex on revamped precincts for entertainment and lifestyle could put pressure on cash flow growth.

Goldman Sachs agrees slowing retail sales are a headwind for the sub-sector. Passive A-REITs under its coverage have a skew to ownership of retail assets. The broker upgrades Charter Hall Retail to Buy, believing it provides good value, and that the reaction following the flat guidance from the FY16 results is overdone. The broker considers the company's flat guidance conservative and primarily based on potential earnings dilution from asset sales. Goldman expects the valuation discount will narrow as management executes on its strategy.

Charter Hall is downgraded to Sell as it appears fully priced. The broker acknowledges Charter Hall has achieved scale in funds under management but expects its full valuation multiple will revert to reflect lower earnings growth potential.

Goldman upgrades GPT to Neutral on valuation grounds as it offers investors access to a portfolio of some of Australia's premier retail, office and logistics assets. While the broker does not envisage a material improvement in the supply demand dynamics for Sydney and Melbourne office, and retail may slow, the company's development pipeline offers upside potential.
 

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