Peet Seizes Opportunities

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

-First JVs with Future Fund
-Significant upside to stock
-Positioned for opportunity
 

By Eva Brocklehurst

Residential developer Peet ((PPC)) has acquired stakes in six assets, consisting of two existing projects and four future developments. Brokers welcome the expansion and consider there is much to like about the stock. On FNArena's database there are four Buy ratings, no Hold, no Sell. Targets range from $1.41 (Macquarie) to $1.97 (Deutsche Bank) and the consensus target of $1.69 suggests 48% upside to the last share price. Macquarie believes Peet is on a solid trajectory, with further potential catalysts being progress on debt reduction and more evidence of strong residential conditions.

The company's share of the total acquisition price for the assets is $55m, to be funded through a $47m equity raising, of which the chairman will contribute $7m, and a share purchase plan capped at $5m. The total price for around 3,200 lots is $95m. On Macquarie's calculations the acquisition price per lot is reasonable, given the majority is already in production. The combined impact of the acquisitions and capital raising is expected to be earnings neutral in FY15 and accretive from FY16.

Citi finds it difficult to allocate the asset value going onto the balance sheet on the basis of the information provided and, on face value, it appears to be higher than expected, given the company is intent on reducing on-balance sheet investments. To Citi, also, the major risk with Peet is the high volatility in earnings and that, as a small cap stock, it is highly exposed to one segment – residential housing. That all said, the broker acknowledges the long-term stability in management, sound interest coverage and a diversified land bank in terms of price and geography, and retains a Buy rating.

The acquisitions make perfect sense to Deutsche Bank and the broker continues to believe the stock has significant upside. The acquisitions are mainly in Perth and consist of 25% of Golden Bay Estate, 50% of Midvale/Stratton with two medium density sites in the town centre. Outside of Western Australia the acquisition comprises land next to Aston Craigieburn (Victoria) and 50% of Bluestone Mount Barker (Adelaide). The Golden Bay and Bluestone acquisitions are the company's first public joint venture with the Future Fund.

UBS believes Peet is in an enviable position where it can be both opportunistic and selective in its land purchases. The increased position in Western Australia in the face of moderating resources activity could generate some debate but UBS is comfortable that the company is very familiar with the assets, while the ability to undertake off-market purchases with established partners at attractive prices de-risks the transactions. The broker observes the skew of Peet's earnings will move more towards capital efficient funds management and joint ventures.

UBS has incorporated increased sales from Golden Bay Estate and Mt Barker into estimates and reduced debt and cash level forecasts accordingly. Thee broker increases FY16 earnings forecasts by 2.4% and FY17 by 2.9%. Midvale/Stratton and medium density projects are in the planning phase, with development from 2016, while Craigieburn is longer dated. UBS believes the stock has potential to be re-rated as it begins to earn a more respectable rate of return on its invested capital base.
 

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