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By Pat Barrett, property analyst for UBS

Results season has commenced with some pleasing results. REITs are proving to be a safe haven, with the sector +3.1% year to date vs -5.2% for the All Ordinaries.

The highlights from the larger stocks are:

Vicinity (VCX) - overweight

VCX tightened the FY16 guidance range to the top end of their earlier range. The weighted average cost of debt is now 4.0% (from 4.2%) driving 1.5% of growth in isolation, and the recent Perth acquisitions are 0.5% accretive to earnings. We therefore view current FY16 guidance as conservative but this is prior to the $750m-$1bn asset sale program which is ~4-5% dilutive to earnings when it occurs. VCX are doing well on synergies, now having achieved 90% ($44m) of the $49m in synergies versus the scheme booklet guidance of 75% by June 2016. This was ahead of market expectations and has seen the stock price react positively. The stock is priced on 15x.

Goodman (GMG) – overweight

Impressive. Despite macro headwinds they increased EPS guidance from 6.0% to 7.5%. Management have strong visibility into FY17 and are a well-oiled machine. Interestingly they are now attempting to shift another round of non-core assets to become a premium brand industrial player and have the best stock in the best locations. Sounds like a Westfield plan. The stock is priced on 15x.

Stockland Group (SGP) – overweight

SGP tightened guidance to between 6.5-7.5% EPS growth. The result was headlined by 3.3% comparative underlying profit growth in its passive portfolio and a 14.9% margin across its residential business (12% in pcp). Resi was the highlight with profit up +46% and FY16 settlements slightly ahead of guidance (6,000 lots) implying confidence in a strong 2H16. This is supported by record deposits on hand of 4,492. Despite the strong results the price continues to be impacted by the "don’t touch residential" thematic and trades on a 13x PE. It's a contrarian bet but with a distribution yield of 6.6% and 4-5% medium term growth (11-12% total return pa) you are paid to be patient. The stock is priced on 13x.

Mirvac (MGR) – overweight

Disappointing result largely due to a massive 2H skew for residential earnings. The NTA increased to $1.84 and the price is now $1.85. The CEO, Susan Lloyd-Hurwitz commented that the board continued to see considerable unrealised value in the residential business. The joint venture with Ping An had taken a year to put in place, and while it has started small they were already looking at a second site and have a clear intention to grow this partnership. Their cashflow will turn materially positive in 2H16 and with gearing approaching 25%, they will consider a buyback. There seems little downside to this stock price and a big event risk is M&A; ie. someone gobbles this name up. The stock is priced on 13x.

GPT Group (GPT) – underweight

GPT reported earnings growth of ~5.5% comprised underlying portfolio growth, accretion from acquisitions, and office portfolio lease-up. The new CEO has provided CY17 guidance of 4-5% growth, driven by further lease-up, the cost-out restructure in CY15 and a reduction in the cost of debt. Given the CEO's background at Australand, he identified mixed use opportunities at certain sites comprising Rouse Hill (1,000 apartments), Sydney Olympic Park and Rosehill Business Park at Camellia (3,000 apartments). The group is focussed on internal value creation. The stock is priced on 17x.

Dexus (DXS) – underweight

DXS is one of the largest owners of Australian office space. They delivered a solid result driven by the recognition of $63m trading profits in the period (20% of FFO). On an underlying basis, FFO was up +1.3%, vs guidance of 3.0-3.5% growth for FY16. While office market conditions improved in the period, this has yet to translate to metrics, with comparative rental income down -0.3%. The stock is priced on 12x but this is supressed by the trading profits which are not sustainable through the cycle (selling assets and booking the profit on P&L as opposed to revaluing the assets on balance sheet and lowering gearing).

The big guns will report next week with Scentre Group (SCG) and Westfield Group (WFD) the ones to watch. 



Published on: Friday, February 19, 2016

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