Australia | Aug 17 2021
This story features MIRVAC GROUP. For more info SHARE ANALYSIS: MGR
While Mirvac’s guidance reflects the need to be cautious against the covid backdrop, brokers expect the “real” growth story awaits the resurgence in apartments a year from now and beyond.
-Brokers suspect covid-led uncertainty in FY22 is masking longer-term growth upside
-Timing of future earnings benefits subject to the pending launches of new projects, plus future capital partnering arrangements
-Double-digit growth forecasts in FY22/FY23 driven by substantial apartment pre-sales
By Mark Story
Despite the cautious nature of Mirvac Group’s ((MGR)) below consensus FY22 earning (EPS) guidance, for 7% growth to 15.0c, and distribution of 10.2c a security, brokers appear confident the developer is gearing up for stronger longer-term growth than it is currently brave enough to admit.
There were no surprises from Mirvac’s mixed FY21 result, highlighted by a -9% fall in operating profit to $550 million, and a 61% leap in statutory profit to $901m due to revaluation gains across its portfolio of retail, CBD office blocks, and residential holdings. Due to revaluation gains, Mirvac’s net tangible assets (NTA) increased 5% to $2.67m from $2.54m in FY20.
What did surprise brokers was the group’s highly conservative outlook especially given the group’s strong residential performance. However, Macquarie believes Mirvac’s willingness to provide (any) guidance against the current backdrop highlights the resilience of the group’s commercial portfolio, driven by long WALE (weighted average lease expiry) retail assets and certainty in development earnings.
It is too early to tell what impact lockdowns will have in FY22. Nevertheless, Morgan Stanley suspects the group’s underwhelming guidance, which assumes 3-6 months of disruptions from lockdowns, gives ample room for Mirvac to lift expectations later in the year.
Two key drags on guidance compared to brokers’ expectations were additional rental relief, given the uncertainty surrounding the length of current lockdowns, and the announced $600m divestment of non-core assets expected in FY22. Mirvac confirmed the sale of the Tucker Box Hotel Group for $620m being a 19% premium to carrying value.
Mirvac is also understood to be factoring for around $20m of provisioning related to covid in first half FY22, with this moderating in second half FY22.
While Mirvac’s guidance was -4% below UBS’s expectations, the broker’s FY22-FY24 forecasts remain unchanged based on the underlying health in the business and the group’s history of conservative guidance. UBS is forecasting 12% growth in each of FY22 and FY23 based on an improving backdrop for commercial development and substantial apartment pre-sales.
Despite some conservative assumptions around covid impacts, Credit Suisse is also optimistic that investment net operating income will trend higher due to the impact of development completions. Based on plenty of visibility over the composition of the commercial and mixed-use development pipeline, which could provide a combination of recurring income plus trading profit, the broker still thinks the “real” growth story starts in FY23.
Beyond this point, Credit Suisse expects apartments to again make a meaningful contribution to earnings, plus the full-year contribution from completed active commercial developments, and most brokers tend to be in broad agreement.
Stronger residential earnings are the major driver of upgrades to Citi’s EPS forecasts, with management highlighting that 90%-plus of FY22 residential earnings has been secured, a record for this point in the year. Highlights of Mirvac’s FY21 result included new sales of 3,400, including $300m of apartments, and 2,526 settlements versus guidance of 2,200.
Improving residential earnings aside, other potential earnings tailwinds highlighted by Citi include stronger commercial development profits, additional net operating income from development completions, declining debt costs, and ramp-up in build to rent (BTR).
Despite the roll-off in commercial profits, Macquarie expects FY23 operational EPS to grow by 10% due largely to apartment completions and no rental relief. Consistent with previous expectations, Macquarie expects to see an improving outlook for the group’s apartment developments, with pre-sales aiding earnings visibility into FY23 and beyond.
The broker currently expects development profits of $79m in FY22 to roll off in FY23 given limited future committed developments. However, the broker notes Mirvac has several potential opportunities to backfill these earnings – via office, BTR & industrial – and expects the group to be active on this front.
Mirvac is the largest developer of high-density apartments and will release an additional 1100 new dwellings in the coming year across seven new sites along the eastern seaboard. Around half of these sites are earmarked to be for sale off-the-plan at its Willoughby project in Sydney’s north.
Credit Suisse expects the launch of the group’s seven apartment projects to drive pre-sales to grow in FY22 and this remains a key driver of the broker’s positive FY23 outlook. Credit Suisse expects material contribution from projects such as Waverley, Green Square, and Willoughby, and more in FY24. The broker also sees more meaningful profit potential as/when redevelopment works are undertaken at Harbourside, noting approval for 45,000sqm of gross leasable area for residential development.
Overall, Credit Suisse sees Mirvac’s $10bn commercial and mixed-use development pipeline as a key profit driver over the medium to long term. However, the broker notes the timing of any earnings benefit is to be determined pending launches of new projects as well as any capital partnering arrangements.
While Mirvac is targeting a gross profit margin of 18-22%, Macquarie notes apartment margins are typically towards the bottom end of margin expectations, while master-planned communities are typically higher. Assuming a 15% margin results in $645m of earnings, a 20% margin would result in $829m of earnings.
While Citi expects weaker office and residential earnings near-term, the broker believes Mirvac’s residential pre-sales provide a degree of support in a more challenging environment following covid.
However, the broker notes if the impact on the company from any risk factors – including covid-related earnings and asset value impacts, or capital-intensive and development exposure to the residential property market — proves to be greater than anticipated, the stock will struggle to achieve the broker's target price of $2.97.
Mirvac will also pursue opportunities to develop more BTR projects to offer more affordable apartments across the country. While the group currently has one operating BTR asset with 315 lots, 80% leased, there are two further BTR projects in the development pipeline.
While practical completion for the BTR assets are spread from FY22-25 a further two BTR developments are in planning stages.
UBS believes Mirvac is well placed to lead the Australian BTR sector given significant work to date. However, the broker notes current targets require proof of operational success in leasing up the existing secured projects, the introduction of external capital, continued supportive government policy, and further acquisitions.
For Mirvac to reach 5,000 BTR units over four years, UBS thinks the group will need to acquire two projects a year (assuming 425 units per project) which is less than current run rates. The broker estimates Mirvac can see earnings upside of 5% in FY23 if the group can introduce 50% capital partners on two BTR projects at a 4% yield.
FNArena's database has four Buy ratings and two Hold. The consensus target is $13.13, suggesting 3.1% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 3.4% and 3.8%, respectively.
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