Company Overview: 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. MGR is known for delivering exceptional workplace precincts, retail destinations, high-quality homes and connected communities for its customers. The company’s strategy is focused on deploying capital with discipline, maintaining an appropriate balance of passive and active invested capital through cycles, and leveraging its integrated model to create, own and manage quality Australian assets.

MGR Details

High-Quality Investment Portfolio: Mirvac Group (ASX: MGR) is a diversified property group in Australia involved in property asset management, third-party capital management and real estate investment. The company’s investment portfolio includes assets across the industrial, office, and retail and build to rent sectors. As of 29 October 2020, the company’s market capitalisation stood at ~$8.50 billion. The company has a high-performing investment portfolio that generates a steady flow of passive income streams. Further, the company’s award-winning asset creation capability, and reputation for delivering exceptional design outcomes continues to drive significant value. The company has a track record of generating decent returns and paying decent distributions to its shareholders.

Although the economic and social impacts of the COVID-19 pandemic continue to evolve, MGR with its robust balance sheet and a diversified debt portfolio seems to be well placed to tackle any short-term impacts of the pandemic. Looking ahead, the company is focused on maintaining continuity across the business and making recovery as quickly as possible from the impacts of the pandemic. Over the last few months, the company has made several structural changes, which will allow MGR to cater to the changing lifestyles of its customers and communities, while unlocking synergies and efficiencies across its operations. With a pipeline of well-located projects within key markets, MGR is well placed to capitalise on market conditions as they improve.

5-Year Financial Summary (Source: Company Report, Thomson Reuters)

FY20 Result Highlights: Despite the challenging operating conditions caused by the COVID-19 pandemic during FY20, the company was able to maintain decent financial performance during the year. For FY20, the company reported a statutory profit of $558 million and an operating cash flow of $455 million. The company’s operating EBIT stood at $796 million in FY20, down by 6% on the previous year. The company’s net tangible assets per stapled security stood at $2.54 in FY20, up from $2.50 in FY19.

Over the year, the company completed approximately 134,300 square metres of leasing across the investment portfolio, with high occupancy maintained at 98.6% and a WALE of 5.6 years. In order to gain resilience against COVID-19 impacts, the company increased debt facilities by $810 million with terms of 3 to 4.5 years and extended the maturity date of some existing facilities for a further 12 months into FY22. As of 30 June 2020, the company had total liquidity of $1.4 billion. Further, the gearing stood at 22.8%, within the company’s target range of 20% to 30%.

FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 27.84% of the total shareholding. The Vanguard Group, Inc. and APG Asset Management N.V. hold maximum interest in the company at 10.55% 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’s current ratio stood at 1.44x in FY20, higher than the industry median of 0.60x, 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.

  Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of 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. For FY21, the company is targeting distribution payout ratio of 65-75% of operating earnings, in line with the policy to distribute up to 80% of operating earnings.

MGR’s Security Price & Distributions Trend (Source: Company Reports)

Q1 FY21 Performance Highlights: During the first quarter of FY21, the company saw resilient performance and made steady progress in building towards a recovery. In its Office & Industrial portfolio, MGR further advanced its active and future development pipeline during the quarter. In its Residential division, the company saw decent enquiry levels, sales, and settlements across the portfolio, reflecting MGR’s high-quality product and exceptional levels of customer care. During the quarter, leads were up 34% and exchanges were up by 40% compared to the previous quarter, mainly driven by masterplanned communities (MPC) projects benefiting from government stimulus as well as apartment projects in WA and QLD.

In response to the customers’ changing needs, and to continue to generate value for its securityholders, MGR has taken several important decisions during the quarter, which includes creation of a new Commercial Property division, consolidating the award winning capabilities of its Office, Industrial, Retail and Build to Rent teams, to be led by Campbell Hanan as Head of Commercial Property. The rent collection rates across the Group averaged 82% for the quarter.

Key Risks:  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 and uncertainties caused by the COVID-19 pandemic and associated retractions. Further, the company is exposed to risks related to the changing domestic and international economic and macro-prudential and regulatory measures. MGR is exposed to risks related to the disruption in the supply chain.

What to Expect:  Due to the uncertainty surrounding the impact of COVID-19 pandemic, the company has not provided FY21 earnings guidance. However, it is targeting distribution pay-out ratio of 65-75% of operating earnings for FY21. Looking ahead, the company is focused on growing its capital partnerships and protect the strength of its balance sheet. Over the long-run, MGR is well placed to capture opportunities and generate value.

In its Industrial segment, MGR seems to be perfectly placed to deliver with its pipeline of strategically located future industrial estates in Sydney. And in its Office segment, the company’s development pipeline of value accretive, city shaping projects is largely secured in capital efficient structures, offering both optionality and future value.  Although the company’s retail portfolio has been heavily impacted by the COVID-19 pandemic, MGR is starting to see customers returning to those centres where they feel it is safe to do so. With a strong focus on the safety and security of its customers, communities and retailer, MGR is well placed to collectively recover and thrive once COVID-19 restrictions are fully lifted. In its Residential division, MGR is expected to bring three new projects (Georges Cove, Green Square’s Portman on the Park and Henley Brook) to market in 1H21. MGR plans to launch a further four new projects during the year subject to market conditions.

With decent earnings profile and robust balance sheet, coupled with a Group-wide development pipeline of $23.8 billion and a steady stream of passive income generated by its investment portfolio, MGR seems to be well placed to rebound quickly from the COVID-19 crisis and continue to deliver for its securityholders.

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 4.91% in the past six months and is trading lower than the average of its 52-week trading range of $1.650-$3.525, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$2.009 and resistance of ~$2.606. We 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). For the purpose, we have taken peers like Stockland Corporation Ltd (ASX: SCP), GPT Group (ASX: GPT), and Goodman Group (ASX: GMG). Considering the company’s decent earnings profile, robust balance sheet, long-term fundamentals, current trading levels and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.130, down by 1.389% on 29 October 2020.

MGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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