Treasure Chest: Stockland

This story features STOCKLAND. For more info SHARE ANALYSIS: SGP

FNArena’s Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Danielle Ecuyer

Whose Idea Is It?

Morgan Stanley

The subject:

Following the acquisition of Lendlease Communities in November last year, Morgan Stanley has upgraded the outlook and target price for diversified Australian property developer Stockland ((SGP)) in anticipation of better-than-expected residential development outcomes and longer-term strategic benefits from the combined portfolios.

More info:

Stockland is an Australian diversified real estate group specialising in property development, ownership, and management. Founded in 1952, Stockland operates across multiple sectors of the property market, including residential, commercial, retirement living, logistics, and business parks, with a focus on delivering sustainable outcomes across its developments.

The broker articulates the combined portfolios of Stockland and Lendlease Communities have the potential to deliver outcomes exceeding market expectations and management guidance. Over the next five years, consensus expectations are for “only” an additional circa 1,600 annual residential settlements from the acquisition, contrasting with management’s guidance of 2,500 annual settlements.

Stockland’s historical productivity and inventory turnover average of 12% suggests to the analyst higher production rates across Lendlease’s 12 master-planned communities can be achieved, adding an additional 1,000-1,500 annual settlements.

There is also optionality for converting around 2,500 lots in the land bank to land lease, whereby buyers acquire the residence and lease the land to reduce upfront capital outlays. This has the potential to deliver a further 500 annual land lease settlements and generate management fees.

Commercial opportunities could generate over $1bn in end value via retail and industrial projects, equating to approximately $168m per annum in earnings before interest and tax (EBIT) to underpin future commercial development earnings. This compares to the analyst’s FY28 forecast of approximately $1.2bn in EBIT.

The acquisition brings forth the largest land bank of approximately 100,000 lots for Stockland’s master-planned communities and land lease, opening the possibilities of higher earnings growth as projected by Morgan Stanley.

Looking further out, opportunities exist on a five-to-ten-year horizon for the vertical expansion of the group’s residential product suite, which can be achieved without additional acquisitions, in build-to-rent and land lease (Halcyon, acquired in 2021, is focused on the development of over-50s land lease communities).

Morgan Stanley points to a pipeline of over 2,000 apartment boxes, more than 2,000 single-family build-to-rent homes, and over 1,000 multi-family build-to-rent projects in its Macquarie Park development. The estimated annual earnings before interest, tax, depreciation, and amortisation (EBITDA) could reach $100m once the developments are completed.

The upbeat outlook is predicated on a recovery in the Australian residential building cycle, with the broker expecting the Reserve Bank of Australia (RBA) to lower interest rates in 2025. Morgan Stanley is forecasting the first rate cut in May.

Stockland is not only attractively priced, trading at a discount to residential peer Mirvac, the analyst suggests, but the business also has limited exposure to the office sector and a less stretched balance sheet.

Although there are risks to Morgan Stanley’s and consensus earnings forecasts if interest rates are not cut, Australia continues to suffer from an acute residential supply shortage and growing downsizing demand from baby boomers.

Morgan Stanley upgrades its target price to $6.50 from $6.35, the highest among FNArena’s daily monitored brokers, with an Overweight (Buy-equivalent) rating.

Citi is also Buy rated, with a $5.80 target price, highlighting the stock as a key idea, given the group’s exposure to affordable residential properties.

Out of the daily monitored brokers that cover Stockland, three are Buy-equivalent rated alongside two Hold ratings. The average target price is $5.636.

On current consensus forecasts (based on five daily monitored brokers) shareholders should enjoy higher dividends again following a reduction in payout for the last financial year (FY24). Forecasts for payouts of 25.3c in FY25 and 28.2c in FY26 equate to yields of respectively 5.1% and 5.7% at today’s share price (ex franking).

In line with these projections, Stockland’s EPS is equally expected to improve significantly from FY24’s weaker performance.

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