Australia | Nov 10 2021
This story features STOCKLAND. For more info SHARE ANALYSIS: SGP
Stockland plans to reshape its portfolio, reducing the weighting of the retail and retirement segments. Is the timing right?
-Increased weighting of portfolio to office/logistics and away from retail/retirement
-Scaling of capital partnerships should allow more funding of developments
-Stockland will seek to divest -$2bn in net assets over the next 12-24 months
By Eva Brocklehurst
Amid uncertainties on the retail/retirement front, Stockland ((SGP)) plans to weight its portfolio towards the office and logistics segments, putting more capital into these areas while accelerating developments and focusing on capital partnerships.
UBS believes the market will welcome the strategy, but questions whether the capital could not be reallocated faster than planned, and with less dilution to earnings and growth.
Moreover, is this the right time to move out of retail/retirement and into logistics/apartments? Credit Suisse asserts the strategy is in the “if only this had been done sooner” category, but accepts it is now a case of being able to deliver successfully.
Stockland is targeting 60% of income from recurring streams and 40% from developments, which the broker notes is unchanged. Also, there are no firm external funds under management (FUM) targets so the main focus is on repositioning the portfolio.
The company has also provided, for the first time, a target of 6%-9% as a return on invested capital (ROIC) for recurring income business, and 14%-18% for developments. The target is "bold" and UBS calculates an overall return on invested capital of 12%-15% should be achieved.
The major change includes downgrading retail as a proportion of the portfolio, to 20%-30%, and retirement to 0%-5%. While the strategy for selling down retirement has not been clearly outlined, UBS assesses the capital target implies a full sale or joint venture is on the cards.
The reduced emphasis on retail and retirement is designed to enhance the quality of earnings, Morgan Stanley asserts, as these segments face uncertainties around returns.
The broker estimates gearing will rise to about 25% from 21% and the targets imply growth in free funds from operations of up to 12% to FY27, suggesting the update is about improving the portfolio rather than accelerating earnings.
Moreover, while Stockland wants to scale up the apartments business; the pipeline of 300 lots looks like a medium-term prospect to Morgan Stanley, rather than a contributor to short-term profits.
The option for redeploying proceeds from the disposal of assets is substantial, Citi notes, as well as the opportunity to grow capital partnerships. The scaling of capital partnerships should provide funding for developments which will, in turn, generate fees and recurring earnings.
Stockland will explore a capital partnership for more than $1bn of its essential retail portfolio and emphasises the $33bn development pipeline: commencements of more than 80% are planned within five years.
Morgan Stanley says the five-year earnings trajectory is unclear given it depends on the timing of divestments and the ramping up of major commercial projects.
Yet changes to capital allocation should generate better growth opportunities, in Macquarie's view. The company plans to divest $2bn in net assets over the next 12-24 months.
Divestment to third parties should reduce the drag on earnings as Stockland receives earnings from funds under management, says the broker. The new funds will have leverage, increasing the return on equity.
The new funds are also likely to carry cheaper debt and Stockland should realise development profits from the sell-down.
Adjusting for development expenditure, and completions, and assuming a 50% sell-down, Macquarie estimates Stockland could face outstanding development costs of $3.7bn, which compares to a best case scenario of roughly $4bn in balance-sheet capacity.
Other sources of capital could include retaining future cash flow and additional sell-downs, the broker highlighting the co-ownership target of 25%-50%.
Risks? A timing mismatch, possibly significant, between divestment and deployment could ensue and result in a greater drag on earnings in the early years before being recovered eventually.
Macquarie also suspects the transition in capital allocation could offset the upside risk stemming from residential settlements in FY23, given the uptick in residential sales in October. The broker remains cautious about the transition out of retail and retirement exposures, particularly as the business is entering sub-sectors where it has less experience.
UBS questions whether Stockland has the capability to deliver across a broad range of sub-sectors, and suspects the market will only fully reward the strategy once signs of execution emerge.
It is tough to gauge the earnings impact from asset recycling and reinvestment but Credit Suisse emphasises this will need to be managed as Stockland transforms the business to a sustainable growth target.
FNArena's database has three Buy ratings and three Hold. The consensus target is $4.88, signalling 7% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 5.9% and 6.2%, respectively.
See also, Stockland Ups Exposure To Land Lease Sector on July 21, 2021.
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