The record-low interest rates, government support programs that accentuated household income, changing lifestyle, and shift in population demographics are some of the growth leavers that contributed to the recovery of the housing market in Australia. The pandemic has changed home buying preferences. In a recent survey by National Australia Bank, Australians were increasingly willing to move away from metro areas to settle down in outer suburbs or regional areas. Buying a house rather than an apartment has also become critical. Home prices in Australia have returned to record levels. As mentioned in the press release by Westpac Bank, the low advertised supply of homes is driving the property prices.
The approvals for dwelling units touched 19,422 units in February 2021 (on a seasonally adjusted basis). This was closer to the highest set out in December 2020. Detached housing made a streak with sharp gains continuing. According to the Reserve Bank of Australia, almost all home builders have expressed that the construction pipelines for detached housing is full for 2021, and the activity is expected to peak in the middle of 2021. By state-wise, New South Wales, Victoria, and Queensland made a strongest growth in building approvals on a sequential basis in February 2021.
Figure 1. Detached Homes Continue to Drive Dwelling Units Approvals:
Data Source: Parliament of Australia, Chart Created by Kalkine Group
Demand for high-density apartments is likely to remain low on the back of rental uncertainty, absence of investor appetite and reduction in net overseas migration. Auction clearances in Sydney and Melbourne hold a steady growth. Rates were consistently above 80% in March, according to Corelogic Research. Households rushed to avail the government’s various schemes before expiry in March 2021 have led to increased building activity, with commencements surging by 18.6% in December 2020 quarter to reach 51,055 units. New private houses commencement improved by 26.6% to 33,761 in the same period, according to the data by The Australian Bureau of Statistics. Stamp duty tax concession by the ACT government, the Commonwealth Homebuilder Program were some of the initiatives that drive the dwelling commencements.
Figure 2. New Private Houses Commencements Continue to Progress Well:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
According to The Commonwealth Bank of Australia, homebuilding activity in Tasmania remained strong owing to population growth and home prices that are relatively low when compared to capital cities. In all the eight states, Queensland took the top position in home loan commitments that surpassed the ten-year average. Being the iconic city, Victoria boasts the top slot for construction work done with +18.8% over the decade average.
Figure 3. Tasmania Boasts the Top Rank in Homebuilding Activity:
Data Source: The Commonwealth Bank of Australia, Chart Created by Kalkine Group
The weighted average residential property prices of eight capital cities, as indicated by the Residential Property Index soared, highest in December 2020 quarter with +3.6% on a YoY basis. Home values at Hobart have been rising rapidly. According to CoreLogic Research, Hobart made 56% gains in housing values over the past five years. Canberra property prices rising consistently over the past 20 months. It had seen limited supply, with a number of home listings down by 31% in April 2021 over last year. While the second lockdown impacted home values in Melbourne, suburbs like Mornington Peninsula took the stride with the fastest growth rate. Similarly, Brisbane inner-city home values have contributed to price gains of the capital city. Prices at Darwin is yet to show recovery, although homes are selling on average 47 days, the fastest rate of sales since 2010. In a separate release by the Reserve Bank of Australia, price gain in regional cities outpaced capital cities by 1.3% in January 2021.
Figure 4. State-Wise Change in Property Prices in December 2020 Quarter:
Data Source: ACT Government, Chart Created by Kalkine Group
By states, NSW boasts the highest mean prices of $939.7k. Lower density housing stretches out higher density housing for price appreciation in Victoria, which is the second most expensive state. NT and TAS occupy the bottom-most grid with average home price at $429.4k and $475.6k, respectively, lower than the nation-wide average price of $728.5k as of December 2020 quarter.
Figure 5. State-Wise Split in Average Home Prices in December 2020 Quarter:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Key Risks: Home prices in Australia have been rising at the fastest pace in the past 32 years. Prices at Sydney and Melbourne markets staged a full recovery as per the recent data by CoreLogic Research. The supply of homes through new listings finds it difficult to cope-up with the demand leading to low inventory levels. This trend may potentially expose the real estate market to a price bubble. Economists warn that property buyers take the heat as the elevated price could push the household debt. The Governor of the Reserve Bank of Australia mentioned that the central bank carefully monitors the lending standards and home price trend. The Australian Prudential Regulation Authority (APRA) in the past deployed various macro-prudential tools to arrest housing prices on low-interest rate regime during the global financial crisis. Home affordability, as per the data by ACT Government, has declined on a trailing 12-months basis, with a proportion of family income needed to meet the average loan repayment have declined by 0.7 percentage points in the December 2020 quarter (on a YoY basis). In a separate report by APRA, the nation saw a surge in the proportion of new loans with a high loan-to-valuation ratio and loans with a high debt-to-income ratio.
Figure 6: Key Risks Affecting the Housing Market:
Source: Analysis by Kalkine Group
Outlook: The housing loan commitments continue to remain elevated. The data by The Australian Bureau of Statistics mentioned that the value of new home loan commitments surged 48.8% in February 2021 (on a YoY basis) to reach $28.64 billion. On a seasonally adjusted basis, loans for construction dwellings surged 4.4%, while first home buyers declined by 4.0% on a QoQ basis, although it remained high over the previous year levels. In a separate report, private capex spends on buildings and structures improved by 0.7% to reach $15.46 billion in December 2020 quarter (on a QoQ basis). This indicates the construction and engineering activities in Australia are expected to gain momentum in the near-term. Housing price is expected to remain steady. The Commonwealth Bank of Australia has projected residential property prices in Australia to see a growth of 14% over the next two years. Considering the developments in the housing market in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Monadelphous Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.08 Billion, Annual Dividend Yield: 3.23%)
Solid Outlook for Iron Ore Sector to Drive Revenues: Monadelphous Group Limited (ASX: MND) provides engineering, construction, maintenance services to the resources, energy, and infrastructure sectors in Australia. The pandemic impacted the company’s second-half performance with supply-chain disruptions, projects delays, etc. About 10% of FY20 revenues were deferred into subsequent periods. The company signed up new contracts worth $640 million for engineering services. It had executed several projects under BHP WAIO Asset Projects. Its maintenance and industrial segment saw $515 million in new contracts and extensions. MND was awarded a 5-year fixed plant maintenance and shutdown services contract with Rio Tinto. Overall revenue edged-up marginally by 0.6% to $1,488.7 million in FY20. Its EBITDA margin contracted to 5.5% in FY20 vs. 6.3% in FY19, mainly due to underperformance of its water infrastructure business.
In H1 FY21, MND experienced decent progress in resources construction projects. It had resumed work that was deferred earlier in 2020. It had secured $360 million in new projects. MND established a SinoStruct fabrication facility in Tianjin, supporting its engineering division. The company continues to broaden services in rail, marine, civil, CSG and corrosion management. Overall revenues grew by 8.3% in FY20 over the prior year. Its profit after tax remained healthy, growing 10.9% over the previous year. MND closed the period with a cash balance of $169.4 million as of December 2020. It had debt amounting to $97.1 million on the balance sheet.
In the recent update, MND has reached an out-of-court settlement with respect to fire incident at Rio Tinto’s iron ore processing facility in Western Australia. On contracts, MND secured a 5-year crane services contract from Fortescue Metals Group valued at ~$150 million.
Outlook: MND is expecting a solid outlook for the Australian iron ore sector. However, declining demand to post a threat to the oil and gas sector. Demand for its maintenance sector is likely to show steady growth in the near-term. The long-term outlook is positive for the renewables sector. The company is expecting FY21 revenues to increase by 10% over the previous year.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs MND (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-16.76% and ~+10.66%, respectively. It is currently trading slightly below the average of the 52-week high price of $15.550 and the 52-week low price of $7.770, implying an accumulation opportunity. The stock outperformed the market volatility index aided by strong growth in the resources sector in Australia. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a premium as compared to its peer average EV/Sales (NTM Trading multiple) as the company recently secured a 5-year crane services contract from Fortescue Metals Group for $150 million. MND is positive on the resources sector in Australia, specifically iron ore, that drives growth for FY21. For this purpose, we have taken peers such as Lycopodium Ltd. (ASX: LYL), NRW Holdings Ltd. (ASX: NWH), Intega Group Ltd. (ASX: ITG), to name a few. Considering the sleuth of new projects, steady profitability in H1 FY21, cash balance, and minimal debt, we give a “Buy” recommendation on the stock at the current market price of $11.480, up by 0.437% on 19th April 2021.
(2) Ale Property Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 945.92 Million, Annual Dividend Yield: 4.49%)
Resilient Portfolio Droves the Performance: Utilities Drove the FY20 Results: Ale Property Group (ASX: LEP) operates as a property investment and property fund management business in Australia. The company owns a portfolio of about 100 pubs. LEP witnessed 0.9% increase in property valuations to $1,174.2 million and average yield at 5.08% in FY20 (vs. 5.09% in pcp). Demand for pub property investment remained strong due to lack of supply. No change in rentals for 43 properties during the year. Increased property revenues and a drop in management expenses translated to a healthy EBITDA margin of 84.9% in FY20.
In H1 FY21 results, LEP experienced a resilient portfolio as all pub operators had paid rentals on time. An increase in CPI rental provided relief, with revenues improved by 1.7% in H1 FY21 over pcp. Property values of its 86 pub assets increased 4.4% to $1,225.7 million as of December 2020. No determination for rental change at its 36 properties. Its profitability surged on the back of strong growth in other income. LEP has a healthy portfolio with a weighted average lease expiry of 7.8 years in addition to four 10-year options to renew. Gearing decreased to 39.7%, with 100% of its forecasted net debt were hedged over the next 4.9 years. It had closed the period with a cash balance of $32.6 million, well adequate to cover the upcoming debt facilities.
As per the latest development, LEP has entered into a binding agreement with banks for $100 million loan facilities and to issue 3.5-year floating rate notes for $150 million. These debts were raised to refinance the $250 million debt facility that was entered in April 2020.
Outlook: LEP is expecting a positive outlook for FY21 earnings and valuations following the receipt of the 2018 rental determinations.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs LEP (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-1.99% and ~+7.45%, respectively. It is currently trading above the average of the 52-week high price of $5.510 and the 52-week low price of $4.000. The stock performed well over the market volatility index citing strong demand for investment in the pub property business. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a discount as compared to its peer average Price/Book Value (NTM Trading multiple), citing elevated debt profit vis-à-vis its peers and rising vacancy rates in Australia may affect rental appreciation and collection of its leased properties. For this purpose, we have taken peers such as LendLease Group (ASX: LLC), Cedar Woods Properties Ltd. (ASX: CWP), Goodman Group (ASX: GMG), to name a few. Considering the resilient nature of pub properties, healthy EBITDA margin, a surge in profitability in H1 FY21, we give a “Buy” recommendation on the stock at the current market price of $4.700, down by 0.424% on 19th April 2021.
(3) Mirvac Group (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 10.08 Billion, Annual Dividend Yield: 3.04%)
Residential Projects to Drive Momentum: Mirvac Group (ASX: MGR) operates in a property investment and property development business with exposure to residential and commercial projects. MGR had a portfolio of 55 assets with weighted average leasing life of 5.6 years and 98.6% occupancy as of June 2020. It had about 27,361 residential pipeline lots. The company delivered six new urban assets in Australia during the year. Its residential portfolio provided an uplift in FY20 revenues with an increase of 12% over the prior year. Reduced development in office and industrial segments impacted profitability but mitigated by a reduction in tenant incentives and capex. Cash collection improved with collection rates at 85%.
Office & Industrial and Retail portfolio showed an increase of 4% and 44% in H1 FY21 revenues over the prior year. Decrease in lot settlements affected residential revenues. Stabilization in operating environment resulted in positive EBITDA margin at 34.0% in H1 FY21 (vs. 30.1% in pcp). The company has a development pipeline of $28 billion of projects with $16.0 billion in residential and $8.8 billion in office/ mixed-use. It had witnessed a healthy collection rate of 90%. Rent waivers from tenants affected profitability, with profit after tax declined by 35.4% over the previous year. MGR closed the period with a cash balance of $245 million as of December 2020.
Outlook: MGR is on track to release four new residential projects in H2 FY21. It is expecting positive sentiments to drive back investors to the market. MGR is expecting to settle greater than 2,200 lots in FY21. The company has guided to achieve FY21 EPS of 13.1-13.5 cpss and DPS of 9.6-9.8 cps.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs MGR (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~1.59% and ~14.80%, respectively. It is currently trading above the average of the 52-week high price of $2.840 and the 52-week low price of $2.010. The stock outperformed the market volatility index on the back of strong performance by the residential property market in Australia. We have valued the stock using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium compared to its peer median Price/Book Value (NTM Trading multiple), citing the company’s progress in the residential property business with a pipeline of $28 billion of projects. MGR is expecting to release four new residential projects in H2 FY21, and it expects to settle greater than 2,200 lots in FY21. For this purpose, we have taken peers such as LendLease Group (ASX: LLC), Cromwell Property Group (ASX: CMW), Vicinity Centres (ASX: VCX), to name a few. Considering the steady collection rates, healthy cash balance, valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.550, down by 0.391% on 19th April 2021.
(4) Wagners Holding Company Ltd. (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 389.36 Million, Annual Dividend Yield: 0%)
Spending on Public Infrastructure To Support Growth: Wagners Holding Company Ltd. (ASX: WGN) is engaged in the construction of roads and tunnels, bridges, airports, mining and gas plants, dams, and other infrastructure projects. Its FY20 revenues saw increased contribution from transport, quarry, concrete and CFT businesses. Higher activity in pedestrian infrastructure favourably impacted its New Generation Building Materials (NGBM) business. The gross margin was impacted by lower margin work. EBITDA margin slides down to 10.7% in FY20 (from 15.2% in pcp) due to increased repairs and maintenance costs, loss of utilization due to the pandemic, and increase in R&D costs. Increased legal and insurance costs affected profitability.
Its construction business posted a $33.0 million increase in revenues during H1 FY21 aided by cement, quarries, transport, and cement businesses. Lower activity in public infrastructure affected its NGBM business. EBITDA margin improved to 13.6% in H1 FY21 as compared to 8.8% in pcp. Operating cash flows improved to $32.4 million because of steady operations. It had posted net debt of $61.1 million as of December 2020. The company has significant headroom to borrow further. The company able to control its capex spend toward strategic priorities.
Outlook: WGN to see increased demand in the UK and Europe for its NGBM business. It had begun production on the $40 million cross-river Rail project. WGN secured several long-term haulage projects catering to the resources sector. Production capacity to double and revenue to grow from public infrastructure and road bridge market. The company to focus on the US and Middle East market for composite fibre technology projects.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs WGN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~10.81% and ~43.36%, respectively. It is currently trading above the average of the 52-week high price of $2.190 and the 52-week low price of $0.650. The stock performed well over the market volatility index on the back of strong performance in the engineering and construction business divisions. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a discount as compared to its peer median EV/Sales (NTM Trading multiple) as the public infrastructure business is dependent on the government’s budgetary spend, and it may deviate revenue growth. For this purpose, we have taken peers such as CSR Ltd. (ASX: CSR), Brickworks Ltd. (ASX: BKW), Adbri Ltd. (ASX: ABC), to name a few. Considering growth plans for international markets, contract wins, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.070, down by 0.481% on 19th April 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential,risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.