Company Overview: GPT Group (ASX: GPT) is one of Australia’s largest diversified listed property groups with high quality Australian retail, office, and logistics property assets. The company was listed on ASX in 1971 and since then it has established itself as one of the leading diversified listed property groups. The company’s portfolio includes some of Australia’s most prominent real estate assets, including Melbourne Central and Highpoint Shopping Centre in Melbourne, Darling Park and 2 Park Street in Sydney, Australia Square, Governor Phillip Tower and Governor Macquarie Tower.
GPT Details
High-Quality Portfolio of Assets: GPT Group (ASX: GPT) is an owner and manager of a diversified portfolio of high-quality Australian retail, office, and logistics property assets. As on 17th September 2020, the company had a market capitalisation of ~$7.73 billion. The company’s strategy is to develop modern high-quality logistics assets for its portfolio and leverage its rich real estate experience to deliver strong returns through disciplined investment, asset management and development. The company started FY20 with a good momentum with expectations of delivering EPS and distribution growth of 3.5%. However, due to the emergence of COVID-19 pandemic in late March, the company witnessed challenging operating condition which impacted its overall H1FY20 results. During the last financial year, i.e., FY19, the company made significant progress towards its strategy and achieved several key milestones, including selling its stake in the MLC building, successfully executing equity raising for $867 million, acquiring a stake in the Darling Park assets and growing its logistics portfolio by approximately 30%. Notably, in the last five years (2015 to 2019), the company’s Net Tangible Asset (NTA) per security and FFO per security has grown at a CAGR of 8.6% and 3.68%, respectively.
NTA and FFO Growth Summary (Source: Company Reports)
The company’s achievements in FY19 were somewhat overshadowed recently due to the impacts of COVID-19 pandemic and its associated restrictions. Lately, the working environment has improved with the relaxation of restrictions by the Government. In order to prepare well for the uncertainty, the company has deferred all non-essential capital expenditure and has removed short-term as well as long-term incentive programs. Although there is a great deal of uncertainty surrounding the impacts of COVID-19, a high-quality portfolio of assets, robust balance sheet and liquidity of more than $1.2 billion will help the company in navigating through the COVID-Pandemic and continue to execute on its strategy. The company is focused on managing the business prudently and safeguarding it from prevailing uncertainties.
Five-Year Financial Summary (Source: Company Reports, Thomson Reuters)
H1FY20 Performance Highlights: For H1FY20, the company reported FFO per security of 12.55 cents per share, down by 23.3% on pcp, impacted by COVID-19, as well as the dilution from the additional securities post the capital raising in June 2019. NTA per security stood at $5.52, down by 4.8% on pcp, impacted by the $711 million reduction in the property asset valuations. Due to the uncertainty in relation to COVID-19, the company had to withdraw its EPS and distribution guidance. In response to the pandemic, GPT implemented measures to reduce its operating costs and deferred all non-essential capital expenditure. The company also suspended planned development projects that had not commenced.
From 1 January to mid-March, the company witnessed positive fundamentals with low vacancy rates in its Office portfolio, however after mid-March, the attendance rates declined significantly as tenants implemented work-from-home arrangements. In its Logistics portfolio, the company saw minimal impact from the pandemic and recorded an occupancy rate of 99.8% as at 30 June 2020. During the half-year period, the company completed three logistics developments with a combined value of $89.1 million and a weighted average lease expiry of 7.5 years. The company also acquired two logistics facilities for $74.6 million with a weighted average lease expiry of 7.6 years. At the end of H1FY20, the company had a robust balance sheet with $1.2 billion of available liquidity held in cash and undrawn bank facilities and gearing of 25.1%.
H1FY20 Results Summary (Source: Company Reports)
FY19 Result Highlights: For the year ended 31 December 2019 or FY19, the company reported total Fund from Operations (FFO) of $613.7 million, up 6.8 per cent on the prior year, driven by decent operating income from the office and logistics segments. In FY20, the company witnessed 6.2% comparable income growth in Office segment, driven by positive rent reversion, fixed rent increases and higher occupancy. In logistics division, the company saw 10.1% growth in income, driven by acquisitions and development completions, offset by lower development profits. The company’s statutory net profit after tax stood at $880.0 million in FY19, down by 39.4% on the previous year, due to lower property valuation increases and a higher negative mark to market of financial instruments of $82.7 million.
During the year, the company made significant progress in executing on its strategy through delivering strong portfolio performance, growing its development pipeline and increasing investment in the logistics sector. Over the year, the company raised a total of $866.8 million via institutional placement and a SPP. These funds were used to fund the acquisition of 25 per cent of Darling Park 1 & 2 and Cockle Bay Wharf, as well as several other growth opportunities.
Financial Summary (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 38.46% of the total shareholding. Unisuper Limited and Vanguard Investments Australia Ltd. hold maximum interest in the company at 14% and 6.26%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
A Quick look at Key margins: For H1FY20, the company’s gross margin stood at 77.8%, higher than the industry median of 73.7%. For the same period, the company’s current ratio stood at 0.9x, higher than the industry median of 0.86x., demonstrating that the company is well equipped to pay its short-term obligations.
Key Margins (Source: Refinitiv, Thomson Reuters)
5-year Average DPS growth of 4.5%: The company follows a distribution policy that effectively aligns the Group’s capital management framework with its business strategy. For FY19, the company paid a distribution of 26.48 cents per ordinary security, up 4% on last year. This reflects a payout ratio of 103.4% of AFFO. The FY19 distribution growth has taken the company’s 5-year Average DPS growth to 4.5%. For H1FY20, the company has paid a distribution of 9.30 cents per security, representing a payout ratio of 99.6% of free cashflow. Before COVID-19, the company was expecting to achieve a growth of 3.5% for its FY20 distribution per ordinary security. However, due to the rapid change in the company’s operating environment, and the uncertainty and unpredictability caused by COVID-19 outbreak, the company has withdrawn its distribution guidance.
Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic and associated restrictions. Further, the company is exposed to the risks related to the market conditions, interest rates, economic factors, and potential disruption. The company is also exposed to various climate-related risks which could significantly impact the property sector.
Outlook: Despite the near-term challenges, the company is continuing to progress on opportunities to grow its logistics portfolio. Over the last 1.5 years period, the company has secured a significant development pipeline and has been successfully developing high quality logistics assets for its portfolio. The development at 32 Smith Street in Parramatta is on track for completion in early 2021 and is targeting a 6-star Green Star environmental rating. It is worth noting that the company’s Logistics development pipeline is a key source of growth with an estimated end value of ~$1 billion.
While the company is dealing with the COVID-19 pandemic, it is simultaneously preparing for the recovery and is focused on the future. The company expects that the significant government stimulus that is being applied and co-operation between the levels of government to revive the economy, will provide GPT room for optimism for the recovery period. With a high-quality portfolio of assets, robust balance sheet and liquidity of over $1.2 billion, the company seems to be well placed to navigate through the COVID-Pandemic and continues to execute on its strategy.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The stock of GPT has corrected by 15.89% on ASX in the past six months and is currently trading lower than the average 52-weeks trading range, offering investors a decent opportunity to accumulate. On the technical analysis front, the stock has a support level of ~$3.66 and a resistance of ~$4.29. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). Considering the company’s high-quality portfolio of assets, robust balance sheet, significant development pipeline in Logistics portfolio, and easing of COVID-19 restrictions, we are of the view that the company is well placed for a recovery period and might witness upside in the coming times. Hence, considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of $3.98, up by 0.252% on 17 September 2020.
GPT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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