Peet’s Good Value, Brokers Say

This story features PEET LIMITED. For more info SHARE ANALYSIS: PPC

– Peet's earnings met expectations
– Forecasts cut given ongoing tough operating conditions
– Stock still offers value according to brokers
– Buy ratings retained

By Chris Shaw

Full year earnings for property development group Peet Limited ((PPC)) rose 4% to $44 million, a result broadly in line with market forecasts and one that followed on from strong earnings growth in FY10. Reported earnings of $22.1 million were impacted by a non-cash write-down to the carrying value of some longer-dated inventory in Queensland.

RBS Australia viewed the result as solid given increasingly challenging market conditions, with these conditions expected to continue for at least the next six months. Market conditions meant settlements in the period fell by 7%, but Macquarie notes this was offset by a 13% rise in average selling prices.

Earnings from development funds rose by 21% in EBITDA (earnings before interest, tax, depreciation and amortisation) terms in FY11 and BA Merrill Lynch notes this offers further evidence Peet is generating growth away from the traditional retail investor base.

Post the full year result brokers have cut earnings forecasts in coming years, BA-ML attributing this primarily to reduced margins on some recent start-up projects. As well, RBS has lowered its numbers simply to take a more conservative view of the performance of all of Peet's divisions given still tough operating conditions.

The magnitude of cuts to estimates is solid, RBS lowering its earnings per share (EPS) forecasts by 12-15% through FY13 and Macquarie by around 11% for each year. Cuts to BA-ML's estimates have been smaller at 2-8%, but the broker had already been below market with its forecasts.

Consensus EPS estimates for Peet according to the FNArena database now stand at 13.2c for FY12 and 14.3c for FY13, which implies a relatively flat earnings outlook given EPS in FY11 came in at around 14.5c.

Earnings growth in FY12 is likely to be heavily weighted to the second half of the year, RBS viewing this as due to the timing of new projects and positive bank revaluations to other parts of the Peet portfolio. Deutsche Bank suggests earnings risk for FY12 remains to the downside given current conditions.

While land supply remains an issue, Peet has managed to lift its land back to 50,684 lots in the last six months, up from 37,100 lots as at the end of December 2010. Macquarie values the land bank at completion at $9.1 billion, up from $6.9 billion last December.

This supports BA-ML's estimate of net tangible assets for Peet of $1.75 per share. The land bank implies 23 years of supply at the current sales rate on BA-ML's numbers.

Given the current share price of Peet is well below estimates of valuation, brokers remain positive on the stock. The FNArena database shows Peet scores a perfect six-for-six Buy ratings, with no changes in recommendations post the earnings result.

The Buy ratings are all valuation calls, RBS noting at current levels Peet is trading on an earnings multiple of less than 10 times for FY11. This falls to just under nine times in FY12 on Citi's numbers, a level the broker estimates is at a 34% discount to the Small Ords index. 

A solid balance sheet adds extra valuation support, Macquarie noting net debt is currently 33.5% of total assets, but should fall in FY12 given an increased focus on syndicated projects and some non-core asset sales.

The size of Peet's land bank also warrants a higher multiple suggests BA-ML, as does the funds business given the growth being demonstrated. As well, BA-ML points out four-year EPS growth for Peet overall should be around 4% annually, this despite an adverse operating environment.

Achieving a good return for investors may take some time however, as BA-ML suggests the current valuation gap is unlikely to close until consumer sentiment improves, interest rates are cut and or further government responses are announced.

With a more conservative approach to earnings forecasts being factored in across the market, price targets for Peet have fallen. The consensus target according to the database now stands at $1.85, down from $2.11 previously. Targets range from $1.53 to $2.25.

Shares in Peet today are slightly weaker and as at 11.20am the stock was down 2c at $1.21. This compares to a 12-month trading range of $1.10 to $2.04. The current share price implies upside to the consensus price target according to the FNArena database of around 53%.

 

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