Australia | Jul 25 2006
By Chris Shaw
Since announcing its tie-up with Babcock & Brown (BNB) last year GPT Group (GPT) has been fairly quiet in the market, but this period of relative inactivity has come to an end with the company’s release to the market of its first wholesale fund.
The group has created a wholesale office fund worth $2.14bn, of which it has retained a 40% stake while receiving proceeds of $1.3bn in an issue that was well received by the market given, as GSJB Were notes, demand was stronger than had been anticipated.
The group intends to use the proceeds initially to reduce debt, leading most brokers to suggest it will be slightly dilutive for earnings in the short-term. But as the broker points out the funds should eventually be reinvested in assets that offer a higher yield, leading to upside for earnings over the longer-term.
UBS agrees, noting the funds received will again allow the company to look at lifting its gearing via acquisitions. It estimates there is upside potential for earnings from the beginning of next year assuming the proceeds can be reinvested to return 7.5%. As with Weres, UBS has a Neutral rating on the stock at current levels, with a share price target of $4.41.
Merrill Lynch estimates the company’s project development pipeline at about $2bn, so it expects the funds to be put to good use. It sees no initial impact on earnings from the issue, as the fees and return on its 40% stake will offset the lost property income. At the same time, it suggests in the longer-term the establishment of the fund offers the potential for a higher return on equity to be generated, while also diversifying the group’s asset base.
It also notes there is the potential for the new fund to incorporate some gearing, which would offer upside risk to earnings estimates. The broker suggests as much as 1.2-1.5% could be added to its forecasts if this occurred. It currently forecasts earnings per unit of 27.5c this year, increasing to 28.2c in FY07 and 29c in FY08. The broker also rates the stock as Neutral at current levels.
JP Morgan has downgraded its rating to Neutral from Overweight on the back of recent outperformance, but points out the wholesale office fund is likely to be the first in a series of new funds put together by the company. It is slightly more bullish in earnings terms though, forecasting earnings of 29.5c in FY06, 28.6c in FY07 and 29.9c in FY08.
Overall the FN Arena database shows three Buy ratings and five Hold recommendations, with an average price target of $4.31. The median price target according to Thomson One Analytics is almost the same at $4.30, while it shows median earnings forecasts of 28c this year, 29c in FY07 and 30c in FY08.
GPT units closed yesterday at $4.40 but have risen to be trading at $4.47 at midday today.