Company Overview: Mirvac Group (ASX: MGR) is Australia’s leading and innovative property group known for delivering exceptional workplace precincts, retail destinations, high-quality homes and connected communities for its customers. The principal activities of MGR include property asset management, third-party capital management and real estate investment. The company’s investment portfolio includes assets across the industrial, office, and retail sectors. The company uses an end to end model, which allows it to design, develop, build, manage and own high-quality Australian assets.
MGR Details
High-Quality Investment Portfolio to Support Long-term Growth Prospects: Mirvac Group (ASX: MGR) is Australia’s leading property group that owns and manages assets across the office, industrial, retail and build to rent sectors. The company’s goal is to enhance the value of cities in Australia through innovative design, development, construction and asset management. The company is fully committed to its strategy of Reimagine Urban Life, which means that it is focused on searching new ways to enhance the urban experience for people staying in the cities of Australia. The company’s development activities allow it to create and deliver innovative and high-quality commercial assets and residential communities for its customers while driving long-term value for its securityholders. Over the last few years, the company has been able to generate decent returns, underpinned by its diversified model and its reputation for quality and operational excellence.
5-Year Financial Summary (Source: Company Reports, (Refinitiv, Thomson Reuters))
Despite the difficult operating conditions created by the COVID-19 pandemic, MGR was able to maintain a decent financial position in FY20. In response to the pandemic, the company took a range of important actions to maintain sufficient capacity and resilience for handling COVID-19 impacts. The company expects FY21 to be a challenging year due to the social and economic consequences of the COVID-19 pandemic. However, with its high-quality portfolio, low capex, and the expected embedded value in its development pipeline, the company seems to be well placed to capture opportunities and generate value over the long term. The company continues to work on its development pipeline, exploring various additional opportunities and improving its capabilities, in order to speed up the recovery process.
FY20 Result Highlights: For the year ended 30 June 2020 or FY20, the company reported an operating profit of $602 million, down by 5% on the previous year, impacted by COVID-19 pandemic and subsequent volatile market conditions. During the year, the company achieved a statutory profit of $558 million and operating cash flow of $455 million. The Adjusted funds from operations (AFFO) stood at $572 million in FY19, up 0.4% on the previous year. The company reported net tangible assets per stapled security of $2.54, up from $2.50 in FY19. Over the year, the company extended its future development pipeline across all segments to $23.8 billion.
From the Residential segment, the company reported an EBIT of $225 million, up by 12% on the previous year. Over the year, the company completed settlements of all remaining lots across seven projects. Further, the company exceeded 2,500 lot settlements with a record level of apartment settlements. From the Retail segment, the company reported an operating EBIT of $128 million, down by 24% on the previous year, due to the divestment of St Marys in 1H20 and COVID-19 impacts. The operating EBIT from Office & Industrial business stood at $484 million, down by 7%, reflecting reduced development activity and COVID-19 impacts.
In order to strengthen its capital position, the company extended the maturity date of some of its existing facilities for a further two months into FY22 and has also increased debt facilities by $810 million with terms of 3 to 4.5 years. The company also reduced average borrowing costs to 4.0 per cent per annum. At the end of FY20, the company’s gearing stood at 22.8%, within the company’s target range of 20% to 30%.
FY20 Operating Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 27.95% of the total shareholding. The Vanguard Group, Inc. and APG Asset Management N.V. hold maximum interest in the company at 10.56% and 5.15%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For FY20, the company’s gross margin and net margin stood at 43% and 26.6%, respectively. The company has a current ratio of 1.44x, higher than the industry median of 0.64x, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity multiple stood at 0.43x in FY20, slightly higher than the industry median of 0.41x.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Track Record of Paying Decent Distributions: The company has a track record of rewarding its shareholders by paying decent distributions. In order to strengthen its capital position, the company reduced the final distribution of FY20 to 3.0 cents per security, taking the full year distribution to 9.1 cents per stapled security, representing $357 million in total. The final dividend will be paid on 14 September 2020 with ex-date of 29 June 2020. In FY21, the company intends to maintain a distribution payout ratio of 65%-75% of operating earnings, subject to the uncertainties related to the impacts of COVID-19.
Distribution History (Source: Company Reports)
Managing COVID-19 Impacts: The COVID-19 pandemic significantly impacted the company’s financial performance in FY20. The company witnessed an impact of $32 million due to delays/timing, including residential sales and settlements. In addition, the company saw a $86 million direct impact from COVID-19, including changing market conditions. In response to COVID-19, the company announced 20% reduction in remuneration for the ELT and the Board and a temporary reduction in working hours for most employees. The company has announced reduction of discretionary spending and deferral of non-essential capital expenditure. In addition, the company has enhanced liquidity with ~$810 million of new debt facilities and liquidity in excess of $1.4 billion.
Key Risks: The company’s FY20 performance indicates that it is exposed to the risks and uncertainty associated with COVID-19. As a property group involved in real estate investment, MGR is also exposed to a number of risks throughout the business cycle, which could impact the achievement of its targeted financial outcomes. The company is exposed to risks related to the changing domestic and international economic and macro-prudential and regulatory measures.
What to Expect: The company expects FY21 to be a challenging year, due to various social and economic consequences of the COVID-19 pandemic. By looking at MGR’s decent earnings profile, robust balance sheet, a steady stream of passive income generated by its investment portfolio, it seems to be well-placed to rebound quickly from the COVID-19 crisis.
The company believes that its future uncommitted pipeline has the potential to deliver over 750,000 sqm (NLA) across mixed-use, office, industrial, retail and build to rent developments. In its Residential Segment, the company recently secured opportunities that are expected to incrementally contribute from FY22-25. In the Residential segment, the company has the capacity to release various new projects and stages in the near-term, including Smiths Lane, Green Square, The Fabric, Woodlea and Olivine.
The net operating income (NOI) of FY21 is expected to benefit from recent development completions. For FY21, the company is targeting a distribution payout ratio of 65%-75% of operating earnings, in line with its distribution policy to pay up to a maximum of 80% of operating earnings, subject to the uncertainties related to the impacts of COVID-19. Despite the challenging operating conditions across all segments, the company’s diversified model, its development pipeline and its high-quality investment portfolio, continue to support the long-term growth of the company.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The stock of MGR has corrected by 30.36% in the past six months and is inclined towards its 52 weeks low of $1.650, offering a decent opportunity for accumulation. With its high-quality portfolio, low capex, and the expected embedded value in its development pipeline, the company seems to be well placed to capture opportunities and generate value over the long term. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in percentage terms). Considering the company’s decent financial position, long-term growth prospects, its recovery plans, decent track record of paying decent distributions, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.180, up by 3.318% on 3 September 2020.
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MGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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