Confession Has Opened Up Value In Mirvac, Brokers Say

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This story features MIRVAC GROUP.
For more info SHARE ANALYSIS: MGR
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

For some time property group Mirvac ((MGR)) has been cum an earnings downgrade, which freed up brokers such as Merrill Lynch, Credit Suisse and Macquarie to place the equivalent of Sell ratings on the stock given there was downside share price risk from cuts to guidance. This view was reinforced by the stock’s underperformance against the sector and the market in recent months.

The company has now come clean and lowered guidance for FY09, with earnings per share next year now expected to be in the range of 23-25c with a dividend of 20c; guidance that largely matches some numbers already in the market. The move has been largely well received as, in Merrill Lynch’s view, the bad news is now out in the open and the share price risk is now priced into the stock.

To reflect this the broker has upgraded the stock to Buy from Underperform as the revised guidance for FY09 is in line with its existing forecasts and the current share price implies a 38% fall in net tangible assets, which it views as unlikely.

Also supporting the broker’s now positive view is the fact its forecasts factor in further slowing in a number of the company’s divisions such as residential and hotels but even allowing for this its valuation is close to 20% above the current share price.

Credit Suisse has similarly reversed course with respect to its rating and gone to Outperform from Underperform, taking the view the company is particularly well placed to benefit from any earnings upside delivered via an expected improvement in residential property markets from FY10 and that it is simply cheap relative to the sector.

On the broker’s numbers the stock is around 15% cheaper than comparable REITs, this despite having a sustainable business model without any excessive need for external capital, an obvious positive given currently unsettled debt market conditions. Its estimates also imply a yield on the shares of around 14% this year and 9% in FY09, which it regards as attractive and boosts the potential total return from buying at these levels.

But Macquarie has not followed the other two brokers in upgrading to a Buy rating, preferring to stick with its Underperform recommendation as while it agrees with Credit Suisse the yield looks attractive it continues to see earnings risk going forward.

Macquarie would look to buy the stock at levels closer to its revised price target of $2.10, which compares to its previous target of $3.20. JP Morgan also lowered its price target from $3.99 to $3.16 post the update, though the broker doesn’t see as much risk as Macquarie and so retains its Overweight rating on the view FY09 will prove to be the bottom of the earnings cycle for the company.

Overall the FNArena database shows the stock is now rated as Buy five times, Hold three times and Underperform once, with the average price target according to the database now $3.06 compared to $3.34 previously. The median price target according to Thomson One Analytics is $3.40.

Shares in Mirvac today are stronger and as at 11.10am were up 14c or 6% at $2.45, which compares to a trading range over the past 12 months of $1.85 to $6.30.

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