Stock of the Day – Stockland (Expensive)
Stockland Corporation Limited (ASX: SGP) is a property investment and development company engaged in the development and marketing of land; construction of commercial buildings; construction and marketing of townhouses; hotel management; management of trusts, investment in commercial properties; and property leasing etc. SGP has four segments: Residential; Retirement Living; Commercial Property; and UK, which develops and manages retail, office and mixed use properties; and is noted to be selling between 5,000 and 6,000 land lots per annum.
Lots settled by Location in FY14 (Source – Company Reports)
SGP has reported FY14 net profit after tax of A$527m; and underlying NPAT of A$555m or 24.0cps in EPS terms which is up 7.1% on FY13. The Company has provided FY15 earnings growth guidance of 6.0- 7.5% implying operating EPS of 25.4-25.8cps anchoring on further improvements in residential operating profit, accretion from retail developments and asset acquisitions. It has been observed that the actual retail net operating income contribution
declined relative to 1H14 and further there is no distribution growth.
SGP may be able to grow its distribution from the current 24.0cps level not before FY17.
The Company reported sales of A$1.94 billion for FY ending June of 2014, reflecting 11.8% increase versus 2013 - still below the level achieved in 2012, and close to what the Company witnessed in 2009. The market capitalization is A$9.81 billion.
Trend in Cap Rates over Time (Source – Company Reports)
The
performance of stock has been appalling. In FY2008, the stock traded as high as A$8.86, versus A$4.22 on 5
th Sep 2014. For the 52 weeks ending 5
th Sep 2014, the stock was up 10.2% to A$4.22. During the 12 months ending 30
th Jun 2014, EPS totaled A$0.23 per share. Thus, the P/E ratio is 18.35 which is higher than the P/E ratio of SGP’s peers. SGP is currently trading at 5.06 times sales and 1.18 times book value.
During the 12 months ending 30
th June 2014, SGP paid dividends totaling A$0.24 per share. With the stock currently trading at A$4.22, SGP has a dividend yield of 5.7%.
The cost of goods sold totaled A$1.11 billion, or 57.2% of sales hence making up to 42.8% of sales as the gross profit, which is
lower than what was achieved in 2013. SGP’s EBITDA was A$581.00 million.
However, SGP had
negative working capital, as current liabilities were A$2.95 billion while total current assets were only A$1.61 billion; with a long term debt of A$2.76 billion and total liabilities (i.e., all monies owed) of A$6.57 billion, as of June 2014.
Cash Flow (Source – Company Reports)
In view of SGP’s product lines, Commercial and Industrial had the highest operating profits in 2014 with operating profits equaling to 70.7% of sales; and Property Development/residential had the lowest operating profit margin in 2014, with the operating profit equal to only 9.1% of sales.
The residential business may appear to operate moderately in view of the strong population growth and reasonable levels of affordability. However, upside risks to earnings should still be closely monitored as it only contributes ~20% of group operating profit. Residential enquiry levels and conversion rates continued to improve for current projects in 2H14 owing to the recent release of the Elara and Willowdale projects in NSW and the Calleya development in WA.
Underlying Profits and Funds from Operations (Source – Company Reports)
Retail metrics and leasing spreads witnessed growth. However, SGP reported limited price growth in the VIC market and the trend for the total portfolio sales looks to be feeble. Also, there was a fall in the rate of growth in WA; which will further blur down as SGP sells through its inventory given the smaller relative land bank.
Specialty sales growth augmented (in view of the recently revamped Townsville and Merrylands centres). Apparel sales also perceived consecutive growth. Performances by SGP’s Office and retirement segments remain sporadic and skimpy.
The recent
outbidding of SGP by Frasers Centrepoint for the acquisition of Australand Property Group – Scrip Offer, comes as a blow to SGP’s success as the deal would have helped SGP in scaling-up industrial and medium density housing. SGP may either look for the next acquisition opportunity or go down the path of the slow build which basically means high cost incur to build a business. Frasers’ bid constituted all cash offer of A$4.48 per Australand security, with security-holders entitled to retain the expected first-half 2014 dividend of AUD 0.1275 (alluring as opposed to SGP’s offer).
Calendar YTD Returns (Source – Company Reports)
In terms of third party engagement, SGP announced that Commonwealth Bank of Australia and its related bodies corporate has ceased to be the substantial holder of the Company. Moreover, SGP has acquired the iconic 12 hectare Brownes Dairy head office, processing and distribution centre. A new JV has also been created with AMP AIMS and with Investa. In 2H14, a separate JV was arranged with IOF for the Piccadilly complex.
In its business segments, SGP has added new format stores to the development (Harris Scarfe, Best & Less, Spotlight, etc.) and removed a few (such as Forster and Burleigh) from the retail development pipeline in the period in view of low returns. Also, Townsville valuation drops ~1.9% in the half post development.
SGP Daily Chart (Source - Thomson Reuters)
The cash flow appears to be laid on temporary lifts in payables and provisions. Specifically, the reported operating cash flow of $752m is above underlying profit; however, operating cash flow of $526m is below underlying profit and the ~$557m of distributions declared in the year when excluding changes in assets and liabilities. This will further reduce in view of capex and incentives when taken into account. In addition, SGP’s major projects lot sales per annum has decreased ~3% relative to 1H14 with declines in WA and QLD. Further, spend at Hervey Bay increased ~$6m to $125m due to design variations, increased scope and incentives. Thus, despite various strategies being adopted, returns appear to be handsomely low. Similarly, for retirement segment, return on assets targets have come down and margins are weak due to low reservations and overpaying for acquisitions in the past.
Stockland does not look to be a striking target, at present, given a relatively subdued medium-term growth, slowing Australian economy, higher household saving rates, fluctuating prices and volumes. Therefore, we rate the stock to be ‘EXPENSIVE’ at this stage.
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