Tag Archives: Property and Infrastructure

article 3 months old

Varied Outlook for AREITs

-Opportunity highlighted in Sydney, Melbourne office
-MS preference lies in US exposure, office segment
-Settlement risk on residential not alarming
-Subdued retail segment expected to continue
 

By Eva Brocklehurst

The outlook for Australian Real Estate Investment Trusts (AREITs) is mixed, with falling rents in some segments reflecting softer economic conditions and a subdued outlook. Overall, the sector has had a strong start to the year and Morgan Stanley believes the drivers of outperformance remain intact, including a low interest rate environment, and a high degree of earnings certainty coupled with relatively attractive growth.

A global outlook report from TH Real Estate suggests US market conditions are supporting a solid performance in the commercial real estate sector, while there remains some potential for marginal growth in Europe. For the Asia-Pacific region the outlook is subdued. The analysts suggest asset pricing has risen to near record highs in the region but corporate and household sentiment has been affected by volatile financial markets and incrementally tighter US monetary policy.

The firm's Asia-Pacific analyst suggests conditions in prime retail and residential markets have worsened in Hong Kong and Singapore while opportunities exist in Tokyo and the Sydney grade B office sectors as well as those segments considered uniquely defensive, such as office and retail in Sydney, Melbourne and Tokyo.

Morgan Stanley re-positions its order of preference, favouring those with a global growth exposure such as Goodman Group ((GMG)) and Westfield ((WFD)) . The view on these two stocks is based on their exposure to US expansion, development completions and urban renewal.

As a whole, the broker believes the industry can continue to outperform and the sector is reasonable value given its historically wide spread to bond yields, but a lower inflationary environment is expected to affect growth over the medium term. Credit conditions are likely to tighten, highlighted by widening spreads. This presents the main risk to the broker's view: if there is a material tightening in credit conditions and a recovery in Australian industrial earnings growth.

Morgan Stanley retains a preference for office AREITs over retail, resuming coverage of Dexus Property ((DXS)) and Investa Office ((IOF)) with an Overweight rating. This preference is driven by a tightening Sydney office market, driving 12% effective rental growth in 2016 and 2017 and a recovery in comparable net operating income growth.

The broker downgrades GPT Group ((GPT)) to Underweight, on valuation. The stock is still appreciated for its defensiveness but better value is envisaged elsewhere in the sector. Mirvac Group ((MGR)) is upgraded to Overweight as the broker remains tactically positive on residential exposure and the company also has an overweight exposure to the Sydney office market.

Morgan Stanley believes house prices are the key metric for residential AREITs, and inputs such as clearance rates, building approvals and interest rates are supportive of house price growth or, at the very least, stabilisation. The broker suspects the market has become too negative on residential exposure on perceived settlement risk.

Macquarie also observes settlement risk has been a topic of discussion regarding both Mirvac and Lend Lease ((LLC)). This follows a tightening of credit standards across the mortgage market, and the emergence of a lack of liquidity for buyers to settle. The broker's checks have revealed some banks are no longer lending to foreign investors.

Importantly, settlements are still occurring. Analysing 26 projects across the sales pipeline for the two companies, the broker identifies some projects in the Docklands region of Melbourne and Brisbane's inner city as being at most risk of default as a result of a depreciation in asset values since the pre-sale date.

The oversupply of stock in the two states is not stretched but annualised 12-month unit approvals are running at 67% for Queensland and 40% for Victoria above respective 10-year averages. Macquarie expects this to exert downward pressure on pricing.

Although not completely confident until the money rolls in, and noting there are no guarantees all buyers will settle, the broker suspects there is compensation for this risk implied in the current share prices, reiterating an Outperform rating for both Lend Lease and Mirvac.

In the retail sector, international names continue to underpin development activity with stores Zara, H&M and Uniqlo taking share from the rest of the shopping centre tenant base. Macquarie observes, given continued store roll-out, that this group's market share will increase to around 2% next year. With around 30% of a regional mall's income typically derived from apparel retailing, the broker also estimates this will place downward pressure on the performances of these shopping centres.

Macquarie is concerned about the impact of international retailers in Australia, as their low price points mean domestic competitors cannot raise their prices to offset the cost impact of a lower Australian dollar. International retailers are generally underpinning most retail shopping centre developments in Australia.

The broker also believes these stores are typically less lucrative for landlords and lower rents suggest initial yields on developments are only slightly above the cap rate – the ratio of asset value to producing income – for many centres. The broker expects the impact of international retailers, a reduction in underlying sales growth in line with slowing population growth and moderation in the housing market will provide headwinds for the retail segment.

Macquarie retains Underperform recommendations for Scentre Group ((SCG)) and Vicinity Centres ((VCX)). The broker's preference among the A-REITs remains with Westfield, Goodman, Mirvac, Lend Lease, Dexus Property and Charter Hall ((CHC)).
 

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article 3 months old

Anxiety Grows Over Planned Cuts To Aged Care Funding

-Cuts to take time to flow through
-Question of ability to offset cuts
-Long-term fundamentals supportive
 

By Eva Brocklehurst

The Australian government's May budget is provoking consternation among analysts of the aged care sector. The government has stated an intention to reduce aged care funding by 2.5% over four years. On the surface this did not appear too severe at the time, but several brokers have paused to review their forecasts.

Listed operators are yet to publicly clarify what the impact of the changes will be or comment about their ability to offset the changes with revenue measures. The industry is currently seeking independent assessment of the impact.

Adding to the anxiety, media reports suggest Estia Health ((EHE)) is one of those in the aged care sector under audit from the federal government for inconsistencies in terms of accessing the Aged Care Funding Instrument (ACFI).

Concerns have been raised about the practice of re-classifying residents of acquired facilities into higher care categories, which attracts extra government funding. The reports suggest Estia Health's average daily payment per patient, already significantly higher than industry average, has grown at a faster pace than peers.

Bank of America Merrill Lynch, after discussions with the sector, believes listed operators face no earnings growth from FY17 to FY19. The broker estimates Regis Healthcare ((REG)), Japara Healthcare ((JHC)) and Estia Health will lose $24 per resident per day in funding by FY19. BA-ML downgrades its rating on all three to Underperform.

Government funding comes from the ACFI, through which it pays a fixed daily amount per resident with extra funding available for those requiring more care. Existing residents will not be affected by the new ACFI rates, so the reduction will take time to move through earnings outcomes. Incoming residents will be subject to the new rates as will any resident whose care is re-assessed. BA-ML expects the frequency of re-assessment to slow.

Brokers assume a number of offsetting measures will be implemented, including raising accommodation prices and services rates for non-concessional residents and using excess ACFI scoring points for some residents to re-classify to higher revenue categories. Yet BA-ML suggests only those operators with below-average accommodation prices and no additional service charges would be able to offset any reductions in ACFI rates, and this does not apply to listed operators.

Competition in the aged care sector is intense, as the industry develops and builds retirement villages and nursing care to accommodate a sharply growing need. While noting data showing just 60% of the industry is profitable, BA-ML also highlights the statistic that 60% of operators in the industry are not-for-profit, so profitability statistics do not necessarily reflect an efficient industry.

Morgan Stanley has also held discussions with unlisted operators and strengthens its thesis of low organic growth for Japara Healthcare and Estia Health. Unlisted operators have indicated the cuts to the ACFI rate are more significant than they had previously thought. ACFI rates of mature assets are forecast to be flat in FY17 and declining by around 2% in FY18.  The ability of both companies to manage the changes will be scrutinised at the full year results presentation in August.

While listed operators are confident additional services revenue, scale benefits and management of some costs will partially offset the lower funding, the broker warns the bear case scenario centres on a larger portion of the revenue decline at mature assets flowing through to lower earnings. This, the broker asserts, would be a catalyst for further downgrades in the sector.

Meanwhile, Morgan Stanley reiterates a preference for Aveo Group ((AOG)), which has had success in New Zealand with its retirement model. The implementation of its strategy in Australia is expected to drive higher turnover and lower risk.

Furthermore, Stockland ((SGP)) is expected to emulate the Aveo Way contract at generic villages, which involves a higher fee for certainty and automatic buy-back. The broker expects higher returns for Aveo over the long term if this contract becomes the norm, although this is not a base case.

UBS believes the FY17 reforms will penalise those pursuing higher care level funding to support growth in average numbers and frailty. UBS lowers its profit estimates across the listed operators by 3% for FY17 and 4-6% for FY18 and believes the net impact will be subject to their ability to offset the changes with revenue measures and cost management.

Yet UBS also believes the emphasis on budget estimates is overdone. If history is any guide, estimates for any year will not be final numbers. UBS considers it fair to assume that the higher funding accessed by listed operators implies greater exposure to the ACFI reductions. Yet the broker calculates a reduction greater than $20 per resident per day applied to the entire industry is a highly improbable outcome.

UBS maintains reactions post the budget have priced in a worst case scenario for the aged care stocks. The broker highlights that a reduction in high complexity ACFI carries a risk that fewer providers will be willing to offer those services, with the unwanted and ultimate fall-out being pressure on the bed block at public hospitals as these patients are more difficult to place.

Notwithstanding the likelihood of subsequent budgets increasing overall spending in residential aged care, the fact that the greater impact of the reductions is felt in outer years means operators have more ability to adapt, and UBS is confident the larger operators, both listed and unlisted, will be able to manage with little net impact to the bottom line.

Morgans concurs, suggesting the long-term fundamentals are supportive and there is an opportunity for operators to make adjustments to offset a reasonable proportion of future cuts to funding.

In the case of Regis Healthcare, the broker observes a deep pipeline of existing and greenfield developments is at hand and uses the uncertainty and share price weakness to add to positions. The broker also recently upgraded Japara Healthcare to Add, citing the large number of beds in its building pipeline.

In the wake of the sell off in the sector, CLSA has also upgraded to Buy ratings on Japara Healthcare and Regis Healthcare. The broker believes it is hard to estimate operator exposure to the potential changes in resident eligibility scores based on publicly available information. Still, the cuts suggest the decline in sector funding will be $4.83 per day in FY18, on a top-down basis. This is also broadly in line with a bottom-up analysis by the broker, which suggests a reduction of $4.96, or 9.8%.
 

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article 3 months old

UGL’s Revival Suddenly Halted

-Possible loss provisions up to $200m
-Infrastructure aids more positive outlook
-Yet smaller size makes UGL vulnerable
 

By Eva Brocklehurst

UGL ((UGL)) has thrown a spanner in the works of broker forecasts, advising that commercial negotiations of claims surrounding the Ichthys contracts are becoming protracted. In the absence of a near-term resolution, the claims will have to be concluded via a formal dispute process and the company advises that this could lead to potential loss provisions of up to $200m.

UGL has been in serious negotiations on the SMP (structural, mechanical and electrical package) contract for the last few weeks and submitted the CCPP (combined cycle power plant) claim 1-2 weeks ago, yet management is not confident negotiations will be completed by the end of FY16.

Morgan Stanley's advice to investors is: wait. The company is highly sensitive to the level of costs, if at all, it can absorb. The broker observes this leads to widely divergent scenarios and potential valuations. Risks are likely to have increased but, equally, UGL may be too pessimistic in its assessment. The broker is mindful that no provision has yet been taken. An update is expected by the FY16 results in August.

Given the uncertainty, the broker limits its reductions in forecasts to those costs evident in the update. FY16-18 forecasts fall 4-38% after removing the implied profit contribution from the Ichthys SMP contract. Morgan Stanley no longer assumes UGL will resume dividend payments from FY17.

Further back in 2014 the company had problems, which new management made progress on cleaning up, and Morgan Stanley believes the business is now on a firmer footing. Nonetheless, the admission that a further $200m could be required for work at Ichthys, while still hypothetical, appears to unravel much of the goodwill that has built up.

When the Ichthys contract was signed in 2014 UGL was a larger business, owning DTZ at the time. Now it has less capacity to absorb problem projects. Reflecting on this state of affairs, Morgan Stanley estimates, on a post-tax basis, a $200m provision could wipe out around one third of the equity. This, the broker asserts, coupled with even a small deterioration in the underlying business, could mean the viability of the capital structure may be challenged.

Macquarie takes a dimmer view of the near to medium term, expecting uncertainty will persist until the project moves closer to completion, around 18 months away. The potential provision assumes no negotiated settlement but rather a formal process, which would take a long time to resolve, given other similar situations in the sector. Hence a double-downgrade to Underperform from Outperform.

The broker acknowledges the company's infrastructure exposure means it has a more attractive earnings outlook compared with many of its more resource-exposed peers but believes, in line with the view espoused by Morgan Stanley, UGL is now of relatively small size and the positive macro outlook needs to be balanced by the ongoing risks at Ichthys.

The one positive aspect of the update Macquarie draws on is that the underlying business is tracking to plan, with guidance reiterated. UGL anticipates a 4% margin in FY17, on revenue growth of at least $300m, excluding Ichthys.

Deutsche Bank is disappointed at the turn of events, but suggests the current share price is already factoring in the worst case scenario of an additional $200m in costs. The broker's revised forecasts assume $21m in additional costs on the Ichthys contracts, with the SMP contract not contributing any earnings in FY16 and FY17. This leads to forecast downgrades of 17% for FY16 and 14% for FY17.

Even under the worst case scenario net debt would peak in December this year and Deutsche Bank does not believe the company would be in breach of any debt covenants. The broker retains a Hold rating and considers the risk/reward balanced.

Citi downgrades profit forecasts by 11% and 13% for FY16 and FY17 respectively. The broker calculates that incorporating another $200m in provisioning into forecasts would push FY16 into the red and send gearing above 20%.

The consensus target on the FNArena databases is $2.36, signalling 2.4% in upside to the last share price. This compares with $2.66 ahead of the update. Targets range from $2.05 (Morgan Stanley) to $2.65 (Deutsche Bank). There are three Hold ratings and one Sell (Macquarie).
 

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article 3 months old

NextDC Expansion Moves Forward

-Reduction in capex estimate a key positive
-Likely to take 5-6 years to fill new capacity
-Less extra funds likely needed for new Sydney site
 

By Eva Brocklehurst

NextDC ((NXT)) has moved a step closer in the expansion of its data centre capacity in Brisbane and Melbourne, acquiring the land. Next comes the building of the two new centres.

Of note, the capital expenditure requirement of $160m is lower than the original estimate of $175-200m provided last November. Practical completion is expected by mid 2017 for both sites.

Brokers believe the company is well positioned for the high demand driven by the exponential growth in internet traffic and the trend towards outsourcing.

Both locations are positioned in close proximity to a major electricity sub station and public transport infrastructure. The Brisbane site in Fortitude Valley is near telco infrastructure and 2km from the existing centre. The Melbourne site is at Tullamarine, 19km from the existing site.

Credit Suisse lauds the reduction in capex estimates as it decreases the full fit-out capital base by 8.0% and allows a comparable return with a lower price. The likelihood of a further equity raising is also reduced for future expansions.

Moreover, starting the development sooner rather than later reduces the risk of development delays affecting FY18 forecasts. Citi is also cautious on this front, believing the main risk is the timely delivery of the finished data centres.

On this subject, the broker notes the rhetoric has changed, with the company now expecting completion towards the end of the second half of FY17 rather than during the half. Otherwise, the broker retains a positive view on the stock.

Macquarie estimates the two new facilities will take 5-6 years to fill and achieve full capacity. Given they are signficantly bigger, Macquarie expects this to allow for larger white space clients which will be attracted to the company’s decision to own land and buildings outright, providing the certainty of available tier 3 MW capacity.

The original Melbourne (15MW) and Sydney (14MW) facilities are tracking to full capacity within four years. Hence, the broker's estimates for 5-6 years for the larger sites.

Late last year the company finalised $220m in funding for the projects, including $100m in unsecured notes. Outstanding notes raised are callable in December and Macquarie suggests this will be an opportunity to recapitalise at more favourable rates.

Credit Suisse expects the company to build its Sydney extension in FY18 and now estimates this will only require additional capital of $55-70m which, if debt funded, could imply peak a debt/earnings ratio of 3.2-3.4. The broker expects that, as the stock matures and becomes an infrastructure-type player its multiple will expand.

Coincidentally, NZ infrastructure business, Infratil, has taken a 48% stake in the Canberra data centre. Credit Suisse observes the transaction values the equity in the centre at $793m and implies a 21.5x enterprise value/earnings run rate.

This allows analysis on the subject of multiple expansion in NextDC's context, as the Canberra centre is a more mature asset with higher utilisation, a smaller development component and lower growth.

The broker's forecasts estimate NextDC's utilisation during FY20 at 71% with a two-year forward earnings growth rate of 16%. While acknowledging its analysis is crude, Credit Suisse calculates this returns a share price of $5.44, offering significant upside should NextDC mature as forecast.

There are six Buy ratings on FNArena's database and one Hold (Ord Minnett). The consensus target is $3.24, suggesting 4.5% upside to the last share price.
 

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article 3 months old

Weekly Broker Wrap: Macro Outlook, Consumer, Property, Hotels, Gas And Insurance

-Policy support needed for growth
-Consumer positive, despite election
-Declining A-REIT development returns
-War footing with hotels and online agencies
-Flaws in gas reservation policy?
-NZ insurance growth under pressure
 

By Eva Brocklehurst

Macro Outlook

Macquarie suspects the Reserve Bank of Australia will need to cut the cash rate further, to 1.0% from the current 1.75%. Recent weak inflation adds to an already subdued outlook and the broker's former risk case is now the base case.

Domestic demand appears weak and the broker perceives additional policy support is needed to sustain current household spending growth, as support from wealth effects wane.

Macquarie believes it will be harder now to generate and sustain inflation near the RBA's target of 2-3.0%. The broker lowers its long-run inflation target to 2.0% from 2.5% and long-run nominal 10-year bond rate assumption to 3.25% from 3.75%.

Macquarie forecasts a sub-2.0% 10-year bond yield forecast to reflect the new record low in the cash rate, but does not make significant downward adjustments to growth. Growth remains narrowly focused with resource exports the main driver, while domestic demand is muted and fiscal policy points to further consolidation.

The broker also expects the recent strength in the Australian dollar will have a dampening effect on the economy in the first half of 2016 and that further depreciation in the currency is required to secure the transition in the economy.

Australian Consumer

Deutsche Bank contends that elections are not that bad for retailing. The election drag on total retail sales growth is calculated to be a modest 30-40 basis points.

The mid year timing of the upcoming election should also be less of a negative because it won't disrupt Christmas trade, although the impact could be greater if a clear result is not forthcoming. The broker continues to believe the consumer is relatively positive, given low inflation in non-discretionary items such as petrol, rent and utilities.

Deutsche Bank believes Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) will trade well because of the strong housing market, a favourable product cycle and the exit of competitors.

Australian Property

Morgan Stanley is questioning the pay-out ratios of retail Australian Real Estate Investment Trusts (A-REITs). Declining development returns are expected to lead to an increasing proportion of capex being used for maintenance purposes.

The broker suspects this may place downward pressure on pay-out ratios, which are currently among the highest globally. The most vulnerable is Vicinity Centres ((VCX) as the company has an expanding tail of underperforming assets.

These could result in further dilution to free funds from disposals beyond current guidance and, if the company reinvests capital into these assets on marginal returns, it will place downward pressure on the pay-out.

Morgan Stanley recommends a switch from Vicinity Centres to GPT Group ((GPT)) given its distribution is covered by cash and the growth prospects are superior.

Hotels And Internet

Hotels have ramped up their online push to reduce the growing share of online travel agencies. As a result, Morgan Stanley observes global brands such as Hilton and Marriott have demanded lower commissions and removed last room availability signs in online sites.

They are encouraging loyalty members to book direct in return for cheaper rates. These brands are then being pushed down in the online agencies' search order.

Given the shifts in the industry the broker expects both earnings and multiples are changing. At this juncture, the case can be made for either side being the winner but the broker envisages potential for 15-30% in share price impact, either positive or negative, for hotel brands and the agencies and this could quickly put a business model at risk or create a price war.

Domestic Gas

The ALP plans to introduce a country-wide gas reservation policy for future LNG projects, which would extend Western Australia's current policy to the east coast, with the intention to reduce the impact of rising prices for the manufacturing sector.

Ord Minnett doubts the efficacy of such a policy, given price increases have been mainly driven by cost inflation and not export parity. The broker believes the relatively high cost of transporting gas currently insulates the southern states from export parity prices.

East coast gas reserves increased to 47,000PJ in 2016 with most of the development underpinning the three LNG projects on Curtis Island. The broker believes the additional requirements on gas producers could stymie much needed reserve developments while east coast reserves are sufficient for just 7-8 years at current rates of use.

NZ Insurance

There is no joy in the trends for general insurance in New Zealand, Macquarie observes. General insurance growth is under pressure and pricing is competitive.

There have been a large number of new entrants in the market and these have focused on commercial lines. AWAC, BHSI and Ando have all been taking market share in commercial, resulting in price pressure.

Meanwhile, personal lines are highly concentrated. Outside of Suncorp ((SUN)), Insurance Australia Group ((IAG)) and Tower ((TWR)) there are few other carriers underwriting personal lines in the country. Macquarie notes IAG has the greatest relative exposure to NZ in general insurance stocks under coverage, at 47% of premiums.
 

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article 3 months old

Transurban Drives Revenue As Traffic Remains Robust

-Sydney, US traffic networks stand out
-Positive catalysts ahead in Victoria
-Queensland demand seen more elastic
 

By Eva Brocklehurst

Toll road developer and operator Transurban ((TCL)) continues to drive revenue, delivering 13% growth off a 2.0% rise in traffic in the March quarter. Excluding Queensland's Legacy Way and the US portfolio, which are ramping up, the underlying Australian portfolio grew by 10%, reflecting 1.0% traffic and 8.0% toll inflation.

UBS notes, despite a slowing in traffic growth in some areas in the quarter, largely reflecting the impact of an early Easter, revenue was strong. Hence, forecasts are unchanged for 15% growth in proportional earnings in FY16.

The broker likes the franchise value from the company's ongoing development opportunities, with four networks providing options as well as barriers to competing funding sources. UBS considers the business capable of generating 10% growth in cash flow over the medium term.

The Sydney and US networks stood out for Macquarie, with traffic growth of 6.8% and 19.0% respectively. Weakness in Queensland was expected, but the strength of major roads in Logan and Gateway more than offset weak roads in the city such as Clem7 and Go Between, the broker contends.

Macquarie was disappointed the company omitted the historical performance of Brisbane's Airportlink and remains concerned about Legacy Way, given it is in ramp-up mode. Higher tolling may explain some of the movement on Legacy Way but it could also reflect a slowing in the economy.

The company suggests the weakness in Brisbane's city roads is from the diversion caused by the opening of Legacy Way and this may continue for another six months. Positive catalysts ahead for brokers include the recently announced upgrade to the Monash Freeway and a commitment by the Victorian government to the Western Distributor project.

The company has changed its reporting metrics, blending fee and toll revenue. Notwithstanding the changes, Macquarie considers the underlying demand trends remain positive. Toll growth is harder to measure but the broker observes a clear impact of technology improvements in Melbourne and Brisbane.

Better technology is capturing more light trucks, adding 150 basis points to growth. Sydney's M7 continues to benefit from the truck toll ramp. At this stage the broker finds little evidence of road works being a drag on numbers but suspects this will become more pronounced in the fourth quarter for Melbourne's Citylink.

As an aside, Macquarie observes there is no sign demand trends are falling, unlike aviation, while there is scope for the stock to surprise on the upside around dividends, especially in FY17. The $5.7bn in capital works is expected to provide the next wave of earnings growth. The broker considers the scope to invest is considerably larger than for the company's peers such as APA Group ((APA)) and Sydney Airport ((SYD)).

Morgans does not include uncommitted projects in its target price but acknowledges the increasingly likely Western Distributor proposal could add 60-70c to valuation. The broker is impressed by the strength of Sydney's traffic demands and also the marked increase in average toll revenues on the express lanes in the US.

This counteracts some negative impacts from Brisbane's roads and Melbourne's Citylink, where the Tulla widening is in train. The broker expects the negative impact of the timing of Easter in the March quarter will reverse in the June quarter.

The Tulla widening is likely to temper inbound city traffic on the company's largest single asset, Citylink, for around 18 months, Morgan Stanley agrees. Also, the Queensland network remains the least robust in terms of growth, which the broker attributes to works on the Gateway and higher demand elasticity in Queensland compared with elsewhere.

The stock remains a top pick for Morgan Stanley, given its distribution outlook as well as growth projects, particularly in a low interest rate environment. The current catalysts are considered the ongoing re-rating of the Virginian roads in the US and progress on the Western Distributor.

Transurban has four Buy ratings and three Hold on FNArena's database. The consensus target is $11.40, suggesting 0.7% upside to the last share price. Targets range from $10.20 (Deutsche Bank) to $12.90 (UBS).
 

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article 3 months old

Peet Set For Re-Rating

-WA exposure declining
-Upside substantial at Flagstone
-Little value implied for funds management


By Eva Brocklehurst

Property developer Peet Ltd ((PPC)) has felt the effects of the slump in Western Australia's housing market, with its share price falling around 19% over the last 12 months amid general concerns that house prices may have peaked nationally.

Worries about the subdued state of WA in the wake of the mining boom are warranted, Moelis contends, but are probably already reflected in Peet's share price. As well, the pricing of peers in the development segment, such as Cedar Woods Properties ((CWP)) and Villa World ((VLW)), suggest to the broker they have a level of support that Peet is missing.

Of note, Peet's WA exposure has now declined to around 24% of earnings and management expects this trend to continue as its east coast projects such as Flagstone in Queensland develop. The broker also observes the company has record contracts in hand. The company's FY17-18 portfolio is expected to benefit from 12 new projects, which will commence work over the next two to three years.

Around 80% of Peet's land bank is expected to be in development during FY17. UBS considers Flagstone, the company's largest development in hand with over 12,000 lots, is a game changer and should help take up some of the slack that will inevitably arise in the WA portfolio. The company's development spending is expected to be self funded while gearing is likely to decline towards the middle of the company's 20-30% target by June this year, Moelis estimates.

The broker notes the stock is currently trading at a 16% discount to its market adjusted net tangible assets of $1.14, which factors in no value for the funds management business that contributes one third to earnings. On this subject, UBS has noted that there is potential for a re-rating as the company begins to earn a more respectable rate of return on its invested capital.

Yet, neither is upside from Flagstone factored into the stock, Moelis maintains. This is a joint venture which the broker believes has material valuation upside relative to its carrying value. Moelis, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $1.45 target for Peet.

There are three Buy ratings on the database as well, Macquarie, Citi and UBS, while Deutsche Bank downgraded to Hold from Buy after the first half results. The broker was disappointed that the company provided no quantitative guidance, but expects conditions in the eastern states will be supportive while WA and Northern Territory remain subdued.

The consensus target on the database is $1.35, suggesting 40.1% upside to the last share price. Targets range from $1.09 (Deutsche Bank) to $1.53 (Citi). The dividend yield on FY16 and FY17 estimates is 4.7% and 5.2% respectively.

One aspect Macquarie flagged at the results was the fact that the company is not exposed to the high risk Sydney apartment market. Peet has three large, low-cost projects on the east coast including Flagstone, the Aston/Craigieburn project in Victoria and Googong in the ACT. The broker expects Peet to be able to grow its earnings even through a weaker residential property scenario, with the majority of earnings emanating from Victoria.

UBS expects earnings growth will be weighted to the second half but still likely, with strength in margins offsetting any shortfall in volumes. The company is observed to be recycling capital to rotate out of higher priced, more mature projects in favour of low priced greenfield land to develop.
 

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article 3 months old

Westfield An Outperformer

By Michael Gable 

The market continues to lack enough conviction to move stocks in any one direction for any one amount of time long enough, with the uncertainty seems to be extending its reach across markets and putting investors on the defensive. US earnings expectations loom as the next hurdle for a market already on the back foot, with a growing number of analysts expecting the largest drop in earnings since the global financial crisis.

Contributing to recent weakness in the S&P/ASX 200 Index, banking stocks remain out of favour against the backdrop of rising bad debts, higher funding costs and uncertainty around housing markets and future capital requirements. In the last week, ANZ has lost 2.5%, with CBA, NAB and WBC shedding 3%, 3.5% and 4.3%, respectively.

Nonetheless, we are always looking for opportunities and in today’s report we include a chart on Westfield Corporation (WFD), which looks interesting.
 


After a great run in 2014, WFD has been tracking sideways for the last year - which is a good performance considering the overall market. It seems to be neatly range-bound within what appears to be a symmetrical triangle. It has already made four movements within this pattern and usually the 5th will see it only come back half way in the range before it makes a final attempt to an upside breakout. Therefore these levels between $9.50 and $10 will represent a chance to pick up WFD before it makes a possible final attempt at breaking to the upside and striving towards $11.


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) 
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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

Competition For Licences In Aged Care Intensifies

-Regis tops listed company allocations
-Estia's allocation disappoints
-Sector remains well supported
 

By Eva Brocklehurst

Competition in the aged care sector is intense, as the industry develops and builds retirement villages and nursing care to accommodate a growing need but requires approvals in the form of bed licences from the federal government.

The 2015 approvals round for the acquisition of new aged care places has been completed. The Department of Social Services received applications for 38,859 new residential aged care places and awarded 10,940. This compares with 2014 when 11,196 places were awarded after the receipt of 19,169 applications.

Morgan Stanley is surprised by this, having expected approvals would increase to indicate a shift to bed licence de-regulation. The largest listed recipients were Regis Healthcare ((REG)), Japara Healthcare ((JHC)) and Aveo Group ((AOG)).

Aveo received approval for 371 places and the broker believes the company's retirement strategy has a clear focus on care, which will attract more residents to the villages and drive earnings. The company has seven villages in the pipeline, expecting one to be completed per annum. Regis and Japara received 844 and 313 places in the allocation respectively, covering their building pipelines to FY19.

Estia Health ((EHE)) received just 12, having been knocked back for licences at its Craigmore and Twin Waters developments. Nevertheless, this is a better outcome in the light of 2014 when the company received no allocation.

Management is confident it can use other licences it holds to complete these projects to plan. Nevertheless, brokers were disappointed at the outcome and believe the company will need to apply for more licences down the track to deliver on its development plan. CLSA analysts concur. In 2016 Estia Health will focus on integrating its acquisitions but retains a plan for 300 or more brownfield and up to 1,000 greenfield places by FY20.

Combined, the listed operators won 10.7% of the available places, above their combined market share of 8.0%. On the basis of this latest round, CLSA analysts believe that, over the longer term, the listed players are likely to build more places and hence grow faster than the rest of the industry.

Deutsche Bank notes the key attraction in the sector is the development opportunity, driven by the expected rise in the aged population. Hence, allocations to both Regis and Japara should support their development plans and deliver a strong uplift in cash flow.

Estia Health's situation is less secure, because of the lower-than-expected allocation, but its development plans are not yet at risk, the broker contends. Deutsche Bank believes the stock offers valuation appeal and it still has sufficient places to support its plans for FY16 and FY17.

The company intends to re-apply for places for its first greenfield project, Twin Waters, at next year's round. As most of its projects are more than two years from scheduled opening there should be sufficient time to secure the required places, in the broker's view.

A total of 62% of the licences this time went to greenfield sites and the rest to re-developments. Regis Healthcare's allocation was second only to Bupa and equated to nearly 8.0% of the total allocated. Deutsche Bank expects this latest allocation will underpin most of its development plans outlined to FY20.

Macquarie also concludes that the outcome was very positive for Regis and less so for Estia, which may slow down a couple of its developments. Aged care development carries high returns on invested capital and is highly value accretive, the broker observes. Macquarie remains positive on the sector.

Deutsche Bank notes the allocations of places by state were mixed. There was a 12% drop in NSW allocations to 2,875 and a 17.9% increase in South Australian allocations to 250. The largest number of places allocated were in Queensland, at 3,120. Northern Territory received an allocation of 65 places, with there being none in 2014. Those operators picking up the most places, in excess of 500, included Bupa, Regis, ICL and Opal.

On FNArena's database Aveo Group has three Buy ratings and one Hold, with a consensus target of $3.63, suggesting 10.6% upside to the last share price. Estia Health has three Buy ratings and one Hold with a consensus target of $7.16, suggesting 19.6% upside. Regis Healthcare has two Buy and two Hold ratings. Target is $5.86, signalling 11.7% upside. Japara Healthcare has two Buy and three Hold ratings with a target of $3.27, signalling 7.5% upside.
 

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article 3 months old

Questions Over Regis Healthcare’s Acquisition

-Surplus land an advantage
-Modest, immediate earnings boost
-Quality assets in prime locations
 

By Eva Brocklehurst

Aged care provider Regis Healthcare ((REG)) has sparked a few surprised reactions over its decision to acquire the Masonic Care assets in Queensland. The net price is $163m, excluding a residential accommodation deposit (RAD) liability of $50m.

Deutsche Bank finds the decision to pay a high price for the Masonic Care portfolio incongruous, given management has a stated preference for development options. Nevertheless, most brokers consider the price, albeit full, can be largely justified by what the acquisition entails.

Deutsche Bank also acknowledges there is a favourable overlap with current operations and the potential to expand the acquired portfolio by 50%, but cannot justify the high price given limited detail on development plans and modelling that suggests the valuation benefit is minimal.

The broker calculates the deal should generate a low double digit return but makes no allowance for the potential boost from development. That said, Deutsche Bank assumes development programs will continue in the medium term and this is partly captured in its multi-stage discounted cash flow valuation.

The portfolio has 711 beds and 244 independent living units and comes with a land bank that has potential to add 385 beds and 210 independent living units.The six facilities exist across four locations, in Brisbane, Cairns, Townsville and Tin Can Bay.

UBS believes the price is high versus industry average transactions over the past 12 months but reflects an immediate earnings contribution. Nevertheless, the acquisition does absorb most of the company's medium-term growth capacity, the broker observes, and will dilute earnings per bed for the company.

Given Regis Healthcare is priced for growth, UBS is inclined to a Neutral rating. The broker increases estimates by 2.3% for FY17 and by 4.9% for FY18 and notes the stock now trades on the highest multiple with the lowest growth outlook among its listed peers.

Macquarie likes the quality of the assets and justifies the purchase price on this basis, plus taking into account the current level of competition in the market. Given the quality of the facilities, the broker estimates the company should generate at least its current level of earnings per place, which would equate to a return around 15%.

There are some aspects to the acquisition Morgans likes as well, including the fact that 99% of rooms are single and occupancy is at 98%, although there is little opportunity for these percentages to improve. Earnings are below the average of other facilities in the company's portfolio so upside potential exists. The broker also acknowledges on the plus side that capital city portfolios are more valuable and the acquisition includes surplus land for development.

Management has guided to $10-12m in additional earnings in FY17. An estimated $5m in capital expenditure is required. Morgans is of the view that the company's track record in development and execution should stand it in good stead and, given the recent share price weakness, moves back to Add from Hold.

FNArena's database shows three Buy ratings and one Hold (UBS). The consensus target is $5.93, suggesting 10.2% upside to the last share price. Targets range from $5.50 to $6.30.

See also, Regis Healthcare Ramping Up Developments on March 2 2016.
 

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