Event Summary
Event Core: On 31st March 2022, the Australian Bureau of Statistics released statistics on dwelling units and the value of buildings approved. The seasonally adjusted estimate for the total dwellings approved surged by 43.5%, attributed to a 16.5% uptick in private sector houses, and the value of non-residential buildings approved advanced to 132.0%.
Update on Private Dwellings: The private sector dwellings, excluding houses, advanced by 78.3%, following a dip of 43.3% in January 2022. The surge was primarily driven by a significant jump in apartment approvals in New South Wales and Victoria. Private house approvals edged up by 16.5% in February 2022, recovering a dip of 16.3% in January.
Update on Dwellings Value: The value of total building approved surged by 67.5% in February 2022, in seasonally adjusted terms. The total value of non-residential buildings advanced significantly by 132%, following a 37.2% dip in January. February 2022 results stood as the second-highest record, behind March 2021, driven by a considerable number of public developments, comprised of 14 projects at an estimated $30 million.
Key Drivers in Real Estate Industry
Improved Labor Force: The unemployment rate has descended to 4.0% in February 2022, down by 0.2 ppts MoM, and correspondingly participation rate hiked to 66.4%, up by 0.2 ppts. Hours worked increased by 8.9% between January and February 2022. On seasonally adjusted terms, full-time employment increased by almost 122k to 9.23 million people, while part-time employment dropped by 0.8 ppts to 31.0%.
Improved Financial Activities in Housing: The household liabilities advanced by 2.2% to $58.3 billion, driven by a $41.8 billion uptick in housing loans and a $1.7 billion rise in short term loans. The growth in housing loans stood the strongest since the June quarter of 2016 and manifested the increased property market activities.
Key Risks and Challenges
The surging real estate prices may outweigh government initiatives; hence affordability may remain a significant concern. Considering potential containment restrictions and recent gap build-up in labour demand and supply, the infrastructure investment activities may witness a cooldown period. Housing activities in metropolitan cities have eroded with substantial crowd movement to regional or outer metropolitan areas due to significant housing preferences updates. With interest rates sustained at low levels and advanced investors’ appetites, some asset pricing, mainly real estate, may seem overvalued.
Outlook
Improved Total Capital Expenditure: In December 2021 quarter, the total capital expenditure in construction and rental, hiring & real estate increased by 13.5% and 8.2% YoY, respectively.
Improved External Refinancing Statistics: In February 2022, the value of external refinancing for total housing surged by 8.6% MoM or 14.7% higher on a PcP basis.
Surged Gross Value Added (GVA): For the December 2021 quarter, the GVA of the Rental, Hiring & Real Estate industry advanced by 4.9% relative to the December 2019 (pre-COVID) quarter and 2.9% quarterly.
Surged Demand for Credit: The credit market outstanding advanced by $179.9 billion or 2.1%. The households demand for credit was recorded at the highest level, driven by increased housing market activity.
Improved Total Construction Work Done: In December 2021 quarter, the value of total construction work done stood at $53.46 billion, up by 2.9% on a PcP basis. The total value of work done in building and residential increased by 2.0% and 0.6%, respectively.
Considering the uptick in dwellings units approved, we have figured out three stocks on ASX that are set to see the momentum.
(1) Goodman Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 42.72 billion, Annual Dividend Yield: 1.31%)
Improving Operational Efficiency and Decent Liquidity Projecting Growth: Goodman Group (ASX: GMG) is engaged in the business of real estate and has operations throughout Australia, New Zealand, Asia, Europe, the UK, and North America, and Brazil. In FY21, the total assets under management (AUM) increased by 12% YoY to $57.9 billion. During the year, a $5.8 billion of revaluation gains were recognised across GMG and partnership assets. Operating profit stood at $1.22 billion, up by 15%, with lower gearing at 6.8%.
In H1FY22, total AUM stood at $68.2 billion, with external AUM clocked at $64.1 billion, up by a considerable 32% PcP. Portfolio occupancy remained at elevated levels at 98.4%, and net property income surged by 3.4% PcP. Operating profits for the period stood at $786.2 million, up by 28% PcP with high gearing at 7.2%. Available liquidity stands at $2 billion, excluding equity commitments, cash, and undrawn debt amounting to $17.3 billion in Partnerships.
Outlook: GMG is forecasting a distribution of 30.0 cents/share, considering the lucrative opportunity to deploy retained earnings. Market guidance for FY22 has been upgraded, with operating EPS growth projected to stand at 20%.
Valuation Methodology: Price to Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs GMG (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GMG went up by ~5.379%. The stock made a 52-weeks low and high of $17.950 and $26.960, respectively. The stock outperformed the market volatility index. The stock has been valued using the Price to Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Considering the recent slowdown in construction activities, the company can trade at a slight discount compared to its peers. For valuation purposes, peers like Arena Reit No 1 (ASX: ARF), National Storage Reit (ASX: NSR), Home Consortium Ltd (ASX: HMC), and others have been considered. Considering the decent liquidity position, elevated occupancy rates, decent uptick in operational metrics, current trading levels and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $22.920, up by 0.218%, as of 04th April 2022.
(2) Monadelphous Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.05 billion, Annual Dividend Yield: 4.07%)
Increased Demand from Resource Sector Magnifying Fundamentals: Monadelphous Group Limited (ASX: MND) provides maintenance, construction, and industrial services to the energy, infrastructure, and resource sector. In FY21, total revenue stood at $1.95 billion, up by 18% YoY, and net profit after tax stood at $47.1 million, up by 29% YoY. During the period, MND secured $950 million of new extensions and contracts. The demand for MND’s services advanced as the industry recovered from disruptions and delays.
In H1FY22, MND clocked a revenue of $1,065 million, up by 12.3% PcP, clocking a half-yearly Maintenance and Industrial services revenue at $596.1 million, up by 21.3%. EBITDA for the period stood at $60.9 million at a 5.7% margin. Net profit after tax increased by 17.7% and was registered at $30.1 million. MND ended with a cash balance of $175.3 million, representing a solid cash conversion rate of 104% for the six months.
Outlook: Demand for maintenance services increased substantially as the industry entered the recovery phase and worked on a backlog of work delayed and deferred during the COVID-19 pandemic. The resource sector is expected to deliver continued growth prospects, with the Australian iron ore industry remaining buoyant.
Valuation Methodology: Price to Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs MND (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of MND went up by ~3.185%. The stock made a 52-weeks low and high of $8.680 and $12.930, respectively. The stock outperformed the market volatility index. The stock has been valued using the Price to Earnings 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 increased demand for maintenance services. For valuation purposes, peers like CIMIC Group Ltd (ASX: CIM), MAAS Group Holdings Ltd (ASX: MGH), Ventia Services Group Ltd (ASX: VNT), and others have been considered. Considering the decent fundamentals, high cash conversion, improved prospects from the resource sector, current trading levels and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $11.340, up by 2.624%, as of 04th April 2022.
(3) Lendlease Group (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 7.60 billion, Annual Dividend Yield: 1.53%)
Cost Saving Targets and Decent Gearing Unveils Growth Prospects: Lendlease Group (ASX: LLC) is involved in the investment, development, and construction of properties and infrastructure. In FY21, LLC clocked statutory profit after tax of $222 million and core operating profit after tax stood at $377 million, up by 83% YoY. The development segment experienced production delays, post which a $60 million pre-tax provision was taken amid lower rental demand. The investment segment delivered a return on invested capital (ROIC) of 5.9%, marginally below the target range of 6% to 9%.
In H1FY22, LLC clocked a statutory loss after tax of $264 million with a core operating profit after tax of $28 million. During the period, the company well progressed in implementing a new operating model while remaining on track for cost savings of over $160 million annually. Gearing stood at 12%, falling at the lower end of 10% to 20% target expectations. Capital allocation towards development climbed to $5.0 billion from $4.4 billion.
Outlook: For FY22, LLC seeks an ROIC range in Investment and development segment of 7.5% - 8.5% and 2% - 4%, respectively. The construction EBITDA margin is projected to stand at 2% - 3%. The company upscaled the investments platform by launching new funds, with funds under management (FUM) anticipated surpassing $70 billion by FY26.
Valuation Methodology: Price to Earnings Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs LLC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LLC went up by ~6.783%. The stock made a 52-weeks low and high of $9.720 and $13.520, respectively. The stock outperformed the market volatility index. The stock has been valued using the Price to Earnings 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 recent disruption in construction activities. For valuation purposes, peers like Lifestyle Communities Ltd (ASX: LIC), Cedar Woods Properties Ltd (ASX: CWP), and Eureka Group Holdings Ltd (ASX: EHG) have been considered. Considering the decent upgrades in FUM, controlled gearing, outperforming guidance, current trading levels and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $11.020, down by ~0.182% as of 04th April 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
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 for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock at the Target Price mentioned as the Valuation has been achieved and subject to the factors discussed above.
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