Australia | Jun 22 2006
By Greg Peel
Property trusts are not the flavour of the month being, as they are, adversely affected by rises in interest rates. Nevertheless, their unpopularity has also resulted in some unjustified selling particularly, as Citigroup finds, in the case of Macquarie DDR Trust (MDT).
MDT has been trading rather poorly over the last few months, even relative to the Listed Property Trust sector. Citigroup notes it is trading 10% below the Australian REIT (real estate investment trust) index. The reason for weakness in the sector is the "likelihood of ever creeping interest rates", as the broker puts it, cutting into earnings forecasts for FY09 and beyond. This then raises doubts about the certainty of maintaining distributions.
Citigroup believes this prevailing attitude has overly penalised MDT both as a REIT and on an absolute basis. At 9.0%, MDT trades at a yield premium to its peers. Even building in downside risk in FY09/10 leaves a yield of 8.5%, Citi calculates. Nor is currency hedging as much an issue with MDT as it is with many peers.
Citi also notes near term positive news, with the US Fairfax residential/retail development approved. This would add pre-tax gains of $15m plus in FY07 which has not yet been factored in by the market (or Citi).
Given currency and debt hedging, the analysts believe the 10.0c distributions over FY07-08 appear secure. Citi’s discounted cash flow valuation has fallen from $1.22 to $1.17 but the analysts are confident in a marked-to-market net tangible asset valuation of $1.45. They have set a target of $1.20. MDT closed yesterday at $1.11.
As MDT is at a discount, the downside is limited. Citi also suggests were the stock to trade lower, Macquarie Bank might implement a "friendly take-out strategy". Citi rates MDT a Buy (medium risk).
A look at the FN Arena database shows MDT is a well-supported trust with 5 Buys and 2 Holds. However, Citi has been the only broker with anything to say lately, with most recommendation updates dating back to February. The current average target price sits at $1.19.