Time To Sell High Yielding BWP Trust?

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– Stockbroker Moelis Has slapped a Sell rating on BWP Trust
– There's a valuation argument plus some operational concerns
– FNArena's Icarus Signal suggests the securities are overvalued

By Andrew Nelson

You can tell by the headline that Sydney based stockbroker and research Moelis Australia, a local operation owned by Moelis & Company, a New York based investment bank, has cut its recommendation on BWP Trust ((BWP)) to Sell from Hold.

Back in February, the broker’s call was at Buy, but it was downgraded post the trust’s interim result on fears that Bunnings might be moving out of two of BWP’s smaller properties. The broker believes that too many of the trust’s properties are of “sub-optimal” size, although it admits around half of these boast longer term leases, so there’s really less medium term risk than you might assume.

But still, the broker sees this as a problem. That said, Moelis analysts Ryan Franz and Simon Scott can see a fix. A fix made easier by a pretty strong share price. The broker reckons the company should look to buy some bigger properties off of Wesfarmers ((WES)), ones that are a little more appropriate size wise for newly built centres.

How?

By leveraging off a share price that sits above valuation. The broker thinks the company should issue equity at around valuation and borrow money at around 6%. This would allow BWP to generate some earnings accretion and reduce the amount of exposure to the aforementioned “sub-optimal” sized properties.

Given such a move may be on the cards, in the analyst’s view, they advise investors better wait for the placement. This makes sense if you have the stock at Neutral, but still doesn’t explain the Sell call.

Three reasons for the Sell:

First, the broker notes that while the dividend yield is at 7.1%, versus a sector average of 6.5%, the former is based on a 100% payout ratio, while the latter is based on only 80%.

Second, the two analysts point out that the stock is trading at a 4.3% premium to the broker’s net tangible assets figure, which they think is unjustified given the risk that Bunnings may well move out of more than two properties.

Third, the broker sees further risks if sales slow for Bunnings. This would put downward pressure on rent reviews and would also crimp annual planned rent increases, as they are tied to inflation, which is slowing.

A quick look at the FNArena database shows us that a number of the big-brand brokers are of a similar opinion on the topic. UBS and BA-Merrill Lynch both rate the stock at Neutral. Citi downgraded to Neutral post February’s interim report, just like Moelis, while JP Morgan has it at Underweight (or Sell).

Thus, the FNArena sentiment indicator has the stock at -0.3, given three Neutrals and a Sell. All four major brokers also have a target price that is lower than the current trading price. On average, the current target is 3.2% below yesterday’s closing price according to the FNArena database.

This means that Moelis' Sell recommendation falls in line with what FNArena's Icarus Signal was telling investors independently (see chart below).

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