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Treasure Chest: Stockland Ready To De-Couple

Treasure Chest | Apr 05 2022

This story features STOCKLAND, and other companies. For more info SHARE ANALYSIS: SGP

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. While Stockland's valuation has traditionally been linked to the residential housing cycle, Morgan Stanley sees new avenues of growth emerging.

By Mark Woodruff

Whose Idea Is It?

Analysts at Morgan Stanley.

The subject:

Stockland ((SGP)).

After 20 years of Stockland’s valuation tracking movements in residential prices, the trend may well reverse in 2022 and 2023.

Morgan Stanley suggests commercial development and joint venture profits, which were previously non-existent, should not only offset an anticipated decline in cyclical residential earnings, but also lift group profit overall.

A precedent has been set for such a transformation. Historically, Mirvac Group ((MGR)) had traded as a residential developer, similar to Stockland, and had typically de-rated when residential prices moderated.

Then, during the 2017-19 residential downcycle, the price earnings multiple for Mirvac actually increased. For two to three years in advance, investors could anticipate that large yearly profits from commercial development were going to be booked for the group during FY18-24.

Currently, Morgan Stanley explains, Stockland’s commercial pipeline holds over $500m in latent profits to be delivered over six to eight years, while its land lease business holds up to $200m in latent profits to be distributed over five years. 

The commercial office pipeline is via a partnership with Ivanhoe Cambridge, while land lease sales will derive from a joint venture with Mitsubishi Estate.

In summary, Morgan Stanley believes the company can execute a similar development strategy to Mirvac and re-rate above its current valuation.

More info:

Morgan Stanley strategists expect downside to Australian house prices in 2023 from RBA interest rate rises, beginning with a 15 basis point (bps) hike in August.

The strategists expect further 25bps RBA hikes for September and November, followed by four 25bps hikes across 2023, with the cash rate reaching 1.75% by the end of 2023.

While residential earnings, via Stockland’s land lot development business, typically make up just 30-35% of group earnings (EBIT), the company’s share price has traditionally been beholden to the residential cycle.

Indeed, Morgan Stanley points out bearishness around a potential slow-down in the residential market is already priced-in, with the company rated as the cheapest in the broker’s coverage of the local Real Estate sector.

Morgan Stanley rates the stock Overweight, with an In-Line sector view, accompanied by a twelve month price target of $5.05.

Shares in Stockland looked like they might be heading for $5 mid last year, but they have subsequently fallen to $3.80 instead, followed by a partial recovery to $4.33. With the exception of Macquarie, brokers monitored daily by FNArena equally have also set price targets above today's share price, ranging between $4.19 (Macquarie) and $5.94 (Citi).

With Stockland shares continuously trading below the average of these price targets since peaking out in June (i.e. FNArena's consensus target), it should thus be of little surprise most ratings are positive, with only Macquarie and Ord Minnett on Neutral/Hold.

If we cast our net a bit wider and include other brokers, we find only Jarden actively covers Stockland, and this does not imply regular updates. Previously, Jarden stood out with a negative view alongside a price target of $4.60, based on a cautious stance regarding Australia's red hot property market, but Jarden is currently under research restriction.

Ex-Morgan Stanley, most commentary has a decidedly cautious tone given the half-yearly financials slightly disappointed, with Stockland requiring a strong second half to meet FY22 guidance.

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