Australia | Dec 06 2011
– Citi initiates on FKP Property with Neutral rating
– Upside and downside risks for earnings are in play
– Refinancing remains a key catalyst
– Buy ratings still dominate on the stock
By Chris Shaw
FKP Property Group ((FKP)) is a diversified play, owning, managing and investing in the retirement, residential apartments and communities, commercial and industrial and funds management sectors of the property market.
Citi has picked up coverage on FKP, rating the stock as Neutral given a relative balance between the potential risks and rewards on offer. Citi's price target is set at $0.54, a 10% discount to its $0.60 valuation to reflect the risks faced by FKP at present.
On Citi's numbers, FKP could enjoy as much as 4.7% earnings per share (EPS) upside in FY12 from an improvement in business conditions. At the same time, the broker sees a potential risk of as much as 9.5% EPS downside if the operating outlook was to deteriorate further.
The other source of potential downside for FKP stems from any restructuring of its retirement platform and upcoming debt refinancing, which amounts to around 37% of group limits. As Citi notes, FKP currently has a short debt maturity profile of around 2.2 years.
Debt facilities are also close to covenants, something Citi notes is not being helped by soft residential markets at present and high holding costs. On a slightly better note, management at FKP estimates there is funding in place at present for the next three years worth of development projects.
While the debt position and weak markets are obvious issues, there are a number of potential positive catalysts for FKP, suggests Citi. These include a restructuring of the retirement assets, though here any process is likely to be complex given FKP is an owner, manager, buyer and seller of assets in the market.
Another potential catalyst would be extending the maturity of group debt at similar or better terms than are currently the case. A recovery in residential markets would be a further positive, while Citi suggests the possibility of FKP being involved in corporate activity in the sector is possible and would be a further potential catalyst for the share price.
In terms of FKP's outlook relative to the market, Citi notes management at FKP has guided to positive net profit and earnings per share (EPS) growth this year. While net profit growth is forecast to come in at 4.2% for the year, Citi notes EPS growth will be lower given the dilutive impact of the dividend reinvestment program.
Three-year capitalised annual EPS growth of 35% is forecast by Citi, which compares to a sector average of 3.7%. Citi is forecasting EPS of 10.4c for FY12 and 10.9c for FY13, which compares to consensus forecasts according to the FNArena database of 10.4c and 11.2c respectively.
Dividend yield is reasonably attractive at around 6.7%, the last two dividends paid by FKP being partially franked.
While Citi rates FKP as Neutral, most of the brokers in the FNArena database are more positive as the stock scores a total of four Buy recommendations and two Holds. Valuation is the driver behind the Buy ratings, JP Morgan's last update suggesting the stock was trading at a discount of around 60% to the broker's estimate of net tangible assets and BA-Merrill Lynch offering a similar argument.
RBS Australia was also among those rating FKP as a Buy, even allowing for the debt refinancing concerns also raised by Citi. The dissenter to the positive views is Macquarie, who remains cautious given the need for FKP to focus on cash and liquidity given current difficult operating conditions in the residential market in particular.
Compared to Citi's price target of $0.54, the consensus target in the FNArena database stands at $0.79. Citi's target on the stock is the lowest, while JP Morgan is the most bullish with a target of $0.97.
The trading range for the stock over the past year has been $0.43 to $0.905. The current share price implies upside of around 59% relative to the consensus price target in the FNArena database.
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