Peet Set For Re-Rating

This story features PEET LIMITED, and other companies. For more info SHARE ANALYSIS: PPC

-WA exposure declining
-Upside substantial at Flagstone
-Little value implied for funds management

By Eva Brocklehurst

Property developer Peet Ltd ((PPC)) has felt the effects of the slump in Western Australia's housing market, with its share price falling around 19% over the last 12 months amid general concerns that house prices may have peaked nationally.

Worries about the subdued state of WA in the wake of the mining boom are warranted, Moelis contends, but are probably already reflected in Peet's share price. As well, the pricing of peers in the development segment, such as Cedar Woods Properties ((CWP)) and Villa World ((VLW)), suggest to the broker they have a level of support that Peet is missing.

Of note, Peet's WA exposure has now declined to around 24% of earnings and management expects this trend to continue as its east coast projects such as Flagstone in Queensland develop. The broker also observes the company has record contracts in hand. The company's FY17-18 portfolio is expected to benefit from 12 new projects, which will commence work over the next two to three years.

Around 80% of Peet's land bank is expected to be in development during FY17. UBS considers Flagstone, the company's largest development in hand with over 12,000 lots, is a game changer and should help take up some of the slack that will inevitably arise in the WA portfolio. The company's development spending is expected to be self funded while gearing is likely to decline towards the middle of the company's 20-30% target by June this year, Moelis estimates.

The broker notes the stock is currently trading at a 16% discount to its market adjusted net tangible assets of $1.14, which factors in no value for the funds management business that contributes one third to earnings. On this subject, UBS has noted that there is potential for a re-rating as the company begins to earn a more respectable rate of return on its invested capital.

Yet, neither is upside from Flagstone factored into the stock, Moelis maintains. This is a joint venture which the broker believes has material valuation upside relative to its carrying value. Moelis, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $1.45 target for Peet.

There are three Buy ratings on the database as well, Macquarie, Citi and UBS, while Deutsche Bank downgraded to Hold from Buy after the first half results. The broker was disappointed that the company provided no quantitative guidance, but expects conditions in the eastern states will be supportive while WA and Northern Territory remain subdued.

The consensus target on the database is $1.35, suggesting 40.1% upside to the last share price. Targets range from $1.09 (Deutsche Bank) to $1.53 (Citi). The dividend yield on FY16 and FY17 estimates is 4.7% and 5.2% respectively.

One aspect Macquarie flagged at the results was the fact that the company is not exposed to the high risk Sydney apartment market. Peet has three large, low-cost projects on the east coast including Flagstone, the Aston/Craigieburn project in Victoria and Googong in the ACT. The broker expects Peet to be able to grow its earnings even through a weaker residential property scenario, with the majority of earnings emanating from Victoria.

UBS expects earnings growth will be weighted to the second half but still likely, with strength in margins offsetting any shortfall in volumes. The company is observed to be recycling capital to rotate out of higher priced, more mature projects in favour of low priced greenfield land to develop.
 

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