Event Core

On 13 October 2021, the Australian Bureau of Statistics published commercials on dwellings commencement and value of building work, which asserts 23.2% QoQ, or 52.8% YoY, upswing in total dwelling unit commencements to 64,596 units. The new private sector house commencements stood high at 40,820 units, an incline of 13.7% QoQ, or 58.9% YoY. Other residential buildings in the new private sector clocked 22,515 units, up by 47.5% QoQ, or 45.1% YoY.

Figure 1: Exponential Uprise in Dwelling Units Commenced Since December 2020 Quarter

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

On Overview of Recent Residential Property Prices

Residential Property Prices at a Boom: In June 2021 quarter, the Residential Property Price Index (weighted average of eight capital cities) surged by 6.7% QoQ and an astonishing 16.8% YoY. The property prices exhibited a sequential incline since September 2020 quarter, predominantly attributed to lucrative government policies on homeownership.

Aggregate Value of Dwelling Stock Surged: The total value of residential dwellings in the country climbed by $596.4 billion and registered a value of $8,924.6 billion in June 2021 quarter. The total number of residential dwellings climbed to 10.680 million recordings a mean price of $835.7k.

Key Drivers of Proliferated Residential Prices: Pricing uptick was spotted in all property markets of all capital cities, wherein Sydney exhibited an 8.1% uptick and Melbourne manifested a 6.1% uptick. The outstanding results were highly attributed to robust demand fueled by surging consumer confidence, record low interest rates, dampened levels of stock in the property market.

Resilience from COVID-19 Impact: The recent containment measures due to the pandemic led to a shutdown in Sydney, which began on 26 June 2021, and following restrictions on other cities did not present a noticeable impact on residential property prices.

Uprise in Value of Work Done Across Real Estate Segments: For June 2021 quarter, the total value of work done in buildings surged by 2.8% PcP and clocked $30.56 billion, and the value of work done in the residential segment swelled by an astonishing 8.9% PcP and stood at $19.05 billion.

Figure 2: Residential Prices Manifested Consistent Growth Since September 2020

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Financial Stability Backing Housing Market

Credit Demand from Households: The demand stood strongest since June 2007, due to favorable housing market activities, which led to new loan commitments. For the June 2021 quarter, households demonstrated increased appetite for housing loans with an increase of $38.0 billion, of which owner-occupier loans grew $31.9 billion.

Lending Activities in Residential Space: In August 2021, new loan commitments for owner-occupied housing surged by 33.5% PcP and investor housing edged up by 92.2% PcP. Business loans for construction activities inclined by 77.3% PcP and for property purchases the commitments boosted by 97.7% PcP. However, the total housing commitments slipped by 4.3% on a sequential basis.

Update on First Home Buyers: In August 2021, the new loan commitments for owner-occupied first home buyers slipped by 3.0%, the fall of the seventh consecutive month, and slipped by 2.1% relative to August 2020. Significant fall was sought in New South Wales, a dip of 11.5%, Victoria, down by 3.8%, and Australia Capital Territory, plunged by 12.7%. COVID-19 containment measures were in effect in these states since July.

Key Risks and Challenges

Figure 3: Driving and Restraining Factors

Source: Analysis by Kalkine Group

The unwinding of the HomeBuilder Grant resulted in consecutive sequential declines in home loan financing activities. Rising real estate prices may outpace government initiatives; hence affordability may remain a significant concern. Dampened movement of international students into Australia shall considerably impact the rental market in key metropolitan cities, especially Melbourne, Sydney, and Brisbane. Recent lockdowns and further uncertainties due to COVID-19 slowed economic activities, affecting household income and expenditure for an extended tenure; hence, scenarios for housing space may turn unfavorable. Sequentially falling housing finance may call indicate potential oversupply in residential real estate space.

Outlook

The Reserve Bank of Australia (RBA) has put a comprehensive set of monetary policies to support the supply of credit and lower funding costs, in turn, lower interest rates for households. Capital expenditure in building and structures for FY22 is forecasted to clock at $74.70 billion, revised upwards by 7.6% from the previous estimate. First Home Loan Deposit Scheme (FHLDS), being a successful program, is to be considered a long-term program as per the National Housing Finance and Investment Corporation (NHFIC). NHFIC reported that FHLDS and New Home Guarantee (NHG) supported 1 out of 10 of the total first home buyers during FY21. Real Estate Institute of Australia identifies tax-deductible interest rates for first home buyers as a major priority for the FY22 budget, benefiting around $4,000/annum to the buyers. Considering the developments in the real estate and property market, we have figured out four stocks on ASX that are set to see the momentum.

(1) Boral Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$6.81 billion, Annual Dividend Yield: 0.00%)

BLD Rides on Completion of key Projects & Decent Outlook: Boral Limited (ASX: BLD) is a producer and distributor of building and construction materials in Asia, US, Australia. The company reported a fall of 9% YoY in revenue to ~$2,716 million during 1HFY21, reflective of lower pricing and demand in Australia. BLD recorded a NPAT of $161.4 million during 1HFY21, up from $136.5 million in 1HFY20. The company had free cash flow of $333 million, as compared to $35 million reported in the year-ago period. The company reduced its net debt (including leases) to $1.9 billion at the end of 1HFY21 from ~$2.58 billion in June 2020.

During FY21, revenues declined by 7% on pcp and stood at $5,346 million, reflecting lower volumes and pricing. Nevertheless, EBIT (excluding Property) for the period stood at $157 million, up by 11% year over year, owing to transformation. The company has recently completed the divestment of its North American Building Products business to Westlake Chemical Corporation for US$2.15 billion. BLD recorded a NPAT before significant items of $251 million, up 44% year over year. BLD holds cash and cash equivalents of $903.8 million at the end of FY21.

Outlook: BLD has set a target of $200 million to $250 million in EBIT Transformation by 2025. The company expects infrastructure activity to augment in 2HFY22 and FY2023, particularly owing to road construction. Capital expenditure for FY2022 is anticipated to be ~$300 million (including new leases).

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

BLD Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last three month, the stock of BLD went down by ~15.18%. The stock made a 52-weeks' low and high of $4.46 and $7.43, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering declining top-line, lower demand and prices in Australia, global uncertainties, leveraged balance sheet, currency fluctuation risk, etc. For valuation purposes, peers like James Hardie Industries Plc, (ASX: JHX), CSR Limited (ASX: CSR), Adbri Limited (ASX: ABC) have been considered. Considering rise in NPAT, the focus on resilient supply chain, EBIT Transformation strategies, decent outlook from the infrastructure activity, and valuation, we give a 'Buy' rating on the stock at the current market price of $6.260, as of 18 October 2021, at 3:00 PM (GMT+10), Sydney, Eastern Australia. 

(2) Wagners Holding Company Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$327.59 million, Annual Dividend Yield: 0.00%)

Decent Fundamentals & Improving Cash Performance Driving Growth: Wagners Holding Company Limited (ASX: WGN) is an Australian construction materials and services provider, operating in domestic and international market. In H1FY21, total revenue increased by 33% year over year and stood at $155.8 million, and EBITDA rose by 10% and stood at $18.6 million. Higher Cement sales, improved quarry volumes, bulk haulage, and better concrete volumes have positively impacted half-yearly revenues. NPAT stood at $1.39 million against a loss of $1.21 million in the year-ago period.

During FY21, total revenue increased by a whopping 71.1% on pcp and stood at ~$323.1 million, and EBITDA went up by 20.6% and stood at $48.3 million. The increase in revenue was primarily driven by precast, concrete, transport and contract crushing. Increase in EBITDA was driven by higher activity across the business and higher margin work in FY21. Operating cash flows improved to $53.1 million in FY21 from $1.14 million in FY20.

Outlook: The company remains on track to commercialise its new product lines and strengthen its global foothold with revenue generation from new geographic locations. WGN has invested in its people, research and development and infrastructure, aligning it well for FY22 and beyond. The prospect for the construction industry in south-east Queensland is encouraging, and the company excepts robust cement volumes in FY22, given the high demand for concrete and other end uses of cement.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

WGN Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last six months, the stock of WGN went down by ~14.25%. The stock made a 52-weeks' low and high of $1.2 and $2.56, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peers, considering COVID-19 pandemic, logistics delays, lack of availability of raw materials. Pricing pressure, etc. For valuation purposes, peers like Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), CSR Ltd (ASX: CSR) and others have been considered. Considering the positive long-term prospects, expansion strategies across the globe, decent liquidity position, rise in revenues, turnaround in profits, and valuation, we give a 'Buy' rating on the stock at the current market price of $1.745, as of 18 October 2021, at 11:00 AM (GMT+10), Sydney, Eastern Australia. 

(3) CIMIC Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$6.38 billion, Annual Dividend Yield: 4.95%)

Robust Pipeline of Opportunities and Decent Cash on Hand to Support Future Growth: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining, services, and public private partnerships group, focused on building a portfolio of complementary capabilities across assets, infrastructure, and resources to amplify insights. CIM reported statutory revenue of $11.4 billion for FY20, down from $14.7 billion in FY19, impacted by the COVID-19 pandemic. EBIT, PBT and NPAT margins stood at 10.3%, 8.7% and 5.4% respectively. During the year, the company completed the sale 50% stake in Thiess, providing CIM additional capital to pursue future growth opportunities. For FY20, the company reported statutory NPAT of $620.1 million, up from the loss of $1,039.9 million in FY19.

For 1HFY21, the company reported improved EBITDA, NPAT and PBT margins of 10.1%, 4.5%, and 5.4% respectively, underpinned by cost reduction initiatives. Group revenues went up a whopping 10.6% year over year, underpinned by growth in Australian Construction and Services business. Free operating cash outflow (pre-factoring) in 1HFY21 stood at $116 million, which improved from the outflows of $282 million in 1HFY20. During the period, CIM was awarded new work of $10.4 billion, bringing the total work in hand to $33.3 billion

Outlook: CIM remains focused on maintaining discipline in capital expenditure, managing working capital and generating sustainable cash-backed profits. The company expects to witness an increased volume of work, thanks to the government’s various stimulus packages in core Construction and Services markets. For FY21, the company expects its NPAT to be in the range of $400-430 million, repressing a growth of 8% to 16% increase on 2020 proforma underlying NPAT.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

CIM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last three months, the stock of CIM went up by ~9.28%. The stock made a 52-weeks' low and high of $16.86 and $27.51, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering the optimistic market outlook, improved margins in 1HFY21, and modest long-term outlook. For valuation purposes, peers like Monadelphous Group Ltd (ASX: MND), Service Stream Ltd (ASX: SSM), Lycopodium Ltd. (ASX: LYL), and others have been considered. Considering the company’s improving bottom line, its track record of rewarding shareholders through dividend and share buyback, expected growth in FY21 NPAT, current trading level and valuation, we give a 'Hold' rating on the stock at the current market price of $20.74, up by ~0.679% as of 18 October 2021. 

(4) GDI Property Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$614.73 million, Annual Dividend Yield: 6.56%)

Key focus on Development Activities & Decent Cash Position: GDI Property Group Limited (ASX: GDI) is an integrated, internally managed property and funds management group. In 1HFY21, the company reported total revenues of $26.03 million, compared to $36.21 million in 1HFY20, owing to the COVID-19 related rent waivers and write-offs and higher net interest expenses, Total FFO during the period also declined from $23.81 million reported in 1HFY20 to $14.25 million in 1HFY21. The company exited the period with a cash balance of $7.10 million.

In FY21, total revenue of the group stood at $54.81 million, down from $70.29 million reported in FY20. GDI’s net profit for the year stood at $22.96 million, as compared to $66.74 million in FY20. Despite the reduction in FFO, the company maintained its level of cash distribution for the year of 7.75 cents per security. The company has a drawn debt on its Principal Facility of $168.8 million and it had undrawn debt of $36.2 million as of 30 June 2021. 

Outlook: The company expects to pay a cash distribution of 7.75 cents per security for FY22, given no material changes in the circumstances. Like the FY21 distribution, GDI expects to pay FY22 cash distribution out of capital. The company got approval for its plan regarding a new 45,000sqm office tower on 1 Mill Street, Perth. The proposed new development is expected to generate massive interest in the occupier market in FY22.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

GDI Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the three months, the stock of GDI went up by ~6.42%. The stock made a 52-weeks' low and high of $1.01 and $1.3, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering the dividend distribution despite the turbulent market conditions and focus on occupier market. For valuation purposes, peers like Centuria Capital Group (ASX: CNI), ALE Property Group (ASX: LEP), Arena REIT No 1 (ASX: ARF), and others have been considered. Considering the current trading levels, property development plans, capital appropriation plans for FY22 and valuation, we give a 'Hold' rating on the stock at the current market price of $1.16, down by ~1.695% as of 18 October 2021. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.

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