Australia saw a strong rebound in home buying activity and prices nationally rose to pre-COVID levels. The re-opening of the economy lifted the employment situation and wage growth, translating to improved housing affordability. Record-low cash rate by the Reserve Bank of Australia, stamp duty concessions, and The HomeBuilder program was targeted to first-time buyers that helped to meet the demand for detached homes. In recent times, prices of houses have increased by more than the prices of units, as mentioned by the Reserve Bank of Australia in its latest monetary review.
As large portions of the population were migrated away from ‘high-rise’ Sydney and Melbourne to regional cities, prices of smaller capital cities and regional places to outperform in 2021, according to Westpac Banking Corporation. Halt on overseas migration due to border closures will continue to linger around the prices of capital cities.
In the latest report by The Australian Bureau of Statistics, dwellings unit approval slumped 19.4% in January 2021 to 15,926 units (on an M-o-M basis) after it peaked in December 2020. Nevertheless, approvals were way higher than pre-COVID levels, with a 19.0% increase on a YoY basis. Western Australia and South Australia showed an unprecedented growth driven by internal migration with 126% and 58% growth, respectively, in January 2021 over a similar period of last year. Sales of new homes increased sharply in December 2020 as first-time buyers rushed to fully secure the $25,000 HomeBuilder grant by signing the contracts before the end of the month. The grant was subsequently extended until the end of March 2021, which is likely to lift buying sentiments in the months to come.
Figure 1. Dwelling Units Although Dropped but Above to Pre-Covid Levels:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Australia’s housing market hit the boom with price gains in every state. Supply of advertised houses hit a record low, falling 26% in the first three weeks of February 2021 from year-ago levels, according to CoreLogic, a property research firm. Mass vaccination rollout and low mortgage rates are likely to keep prices steady. While unit prices are somewhat stabilizing due to demand and supply imbalances, houses (represent 80% of dwelling stock) are showing consistent price gains. It should be mentioned that houses in Sydney and Melbourne accounted for ~60% of total houses in Australia. Softening home prices in Sydney made it the world’s third-least affordable housing market, according to CoreLogic. Change in preferences to low-density houses and detached homes are the key drivers.
Melbourne is undergoing recovery after a double lockdown imposed. Brisbane showed an uptick in both unit values and home price benefited from the demand-supply mismatch. Adelaide showed resilient performance with new highs every month. Homes are sold in 37 days as compared to 43 days a year-ago. Home prices at Perth outpaced unit values due to affordability and increased buyer demand.
The weighted average prices of eight capital cities tracked by The Australian Bureau of Statistics in its Residential Property Price Index showed 3.0% gains in December 2020 quarter over the preceding quarter and surged 3.6% on a YoY basis. Canberra showed a fifth quarterly increase and reported the strongest quarterly movement over levels seen in 2019 similar period. Hobart showed a sharp price gain on a YoY basis driven by detached apartments. Tight supply over lack of demand drove the price movement.
Figure 2. Residential Price Gains Across Eight States:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
According to The Real Estate Institute of Australia, the weighted average median price of houses in eight capital cities improved by 6.0% to $825,205 in the December 2020 quarter. Sydney‘s median home price continues to be the highest at $1,211,488. Perth reported the lowest price at $490,000. Over the twelve months to December 2020, the weighted average median home prices increased by 6.6%.
In Australia, vacancy rates for residential properties are heading south, according to SQM Research, an investment research firm. The national vacancy rate declined by 0.2% to reach 2.0% in January 2021 over the preceding month. Australia now has 71,297 vacant residential properties, lower than 72,422 reported last year. All cities recorded a drop in vacancy rates, with the exception of Hobart. Melbourne continues to have the highest vacancy rate at 4.4% in January 2021 (vs. 4.7% in December 2020). Sydney reported a sharp fall in the rental vacancy rate from 3.6% in December 2020 to 3.2% in January 2020.
Rentals at the national level reported an increase of 1.4% over the past 30 days to February 12, 2021, reaching $497 for houses. Capital cities bounced back with record-high average rentals of $552 for houses, an increase of 0.7%. But it is yet to reach pre-COVID levels. Sydney recorded the highest increase in both house and units asking rents, followed by Canberra.
Figure 3. Declining Residential Vacancy Rates:
Data Source: SQM Research, Chart Created by Kalkine Group
Key Risks: Expiry of various government grants such as The HomeBuilder Scheme, the JobsKeeper Program are likely to directly impact housing demand. Delay in economic revival may affect unemployment and wage growth which, in turn, housing affordability. The bond purchase program by the Reserve Bank of Australia to stimulate the economy keeps yield on the lower end, which affects the investment returns on real estate assets and the CBD market. According to the National Housing Finance and Investment Corporation, the housing demand is projected to fall by 286,000 dwellings between 2020 and 2025 on the back of COVID-19 impact on net overseas migration. From 2023 to 2025, the recovery of the economy is expected see demand exceeding supply. The roll-back of support programs by the government to see demand leaving the market and supply to exceed in the next two years. Series of virus outbreaks to impact buying interest and to put pressure on home prices. Like, Melbourne is yet to show full recovery in prices as series of lockdowns stalled buying and selling. The office CBD market in Australia has seen a vacancy rate touching 11.7% in January 2021, according to the Property Council of Australia. Remote working and work-from-home culture and supply of new office space are the drivers.
Figure 4: Key Risks Affecting Housing Market:
Source: Analysis by Kalkine Group
Outlook:
Building activity is likely to remain resilient, driven by an increase in the value of home loan commitments. According to the data by the Australian Bureau of Statistics, home loan commitments have been trending upwards since June 2020. It had increased by 10.5% in January 2021 over the preceding month and 44.3% over a similar period of last year. The healthy trend in auction clearances is expected to drive housing prices. As per The Reserve Bank of Australia, auction clearance rates increased in December 2020, particularly in Sydney and Melbourne and auction volumes also increased. Westpac Banking Corporation is forecasting dwelling prices to rise 10% nationally in 2021 and the pace is likely to continue in 2022. This is supported by strong credit supply, low mortgage rates to continue for years, and the roll-out of vaccines. The smaller capital cities are likely to continue to outpace in 2021 but the larger growth is focused on three cities namely, Sydney, Melbourne, and Brisbane, as re-opening of international borders to lift-up housing demand. Considering the developments in residential property activity and prices in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
1. NRW Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 953.30 Million, Annual Dividend Yield: 3.82%)
Civil Contract and Mining Segments Drive Growth: NRW Holdings Limited (ASX: NWH) provides civil contracting, construction, and mining services in Australia. Acquisition of BGC Contracting boosted the company’s civil revenues, particularly in the public works projects in FY20. NWH secured a five-year extension contract with Stanmore Coal for Issac Plains East valued at $500 million. New contract wins and higher civil activity supported drilling & blasting revenues. Its order book stood at $3.5 billion, driven by the Bunbury Outer Ring Road project. Overall revenues grew by 85.9% to $2.0 billion in FY20. The company’s EBITDA margin contracted to 12.6% in FY20 (vs. 13.6% in pcp) due to integration costs and reorganization.
Its H1 FY21 revenues showed an increase of 44% to reach $1.17 billion. The acquisition of Primero will widen the clientele base in the design, construction, and operations vertical in the resources sector and boost its mining, energy & technologies segment. The acquisition also helps to diversify into renewables with lithium and hydrogen technologies. Its civil segment continues to outperform, with revenues surged 52%, while mining revenues improved by 46% H1 FY21 over pcp. EBIT declined from $52.9 million in H1 FY20 to $46.6 million in H1 FY21 owing to various one-offs such as cessation of operations and transaction costs. The company closed the period with a cash balance of $171.4 million as of December 2020. It had operated with a gearing ratio of 19.9% vs. 29.6% reported in June 2020.
Outlook: NWH is expecting revenues in the range of $2.2-$2.3 billion for FY21. Its tender pipeline increased to $14.1 billion, of which NWH submitted tenders to the extent of $5.0 Billion. NWH is evaluating various projects in EPC across commodities following the acquisition of Primero.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 NWH (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month negative returns of ~30.61% and ~3.32%, respectively. It is currently trading below to the average of 52-week high price of $3.190 and 52-week low price of $1.000. The stock underperformed the market volatility index due to the effects of the pandemic on the construction industry. We have valued the stock using the EV/EBITDA 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 as compared to its peer average EV/EBITDA (NTM Trading multiple) considering the pipeline projects besides, the impact of Primero acquisition and the favourable revenue projections for FY21. For this purpose, we have taken peers such as CIMIC Group Ltd. (ASX: CIM), Lycopodium Ltd. (ASX: LYL), SRG Global Ltd. (ASX: SRG), to name a few. Considering the resilient performance by Civil and Mining segments project backlogs, strong liquidity, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.040, down by 2.393% on 22nd March 2021.
2. GDI Property Group (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 569.13 Million, Annual Dividend Yield: 7.38%)
Weak Occupancy Affected Rentals Income: GDI Property Group (ASX: GDI) operates as a real estate investment trust (REIT). The company provides property and funds management services. GDI consolidated its position in Perth through acquisitions and expansion activity. Rent waivers and deferrals impacted its property division. Its office property portfolio experienced lower occupancies due to the pandemic and overall revenues declined by ~10% to $70.3 million in FY20 over pcp. It had raised $76.0 million in GDI property trust with 47% co-investment. EBITDA declined by 12.5% to reach $43.9 million in FY20. This includes transaction fees related to GDI property trust.
GDI wrote-off all rent waived during the pandemic. The departure of UGL and transition of properties in upper to lower accommodation levels impacted revenues in H1 FY21. Funds management business showed traction on the back of an increase in acquisition activity of property assets. An increase in incentives and leasing fees paid impacted its funds from operation to $8.1 million in H1 FY21, down from $18.5 million in pcp. EBITDA margin plunged to 46.1% (vs. 63.1% in pcp) impacted by lower rentals, the decline in occupancy rates, etc. It had closed the period with a cash balance of $7.1 million as of December 2020. Total borrowings increased to $192.4 million (from $159.4 million as of June 2020). It had unused lines of $52.2 million under its principal facilities.
Outlook: GDI has strong leasing commitments – two new five-year leases to the Western Australia Police Force, and a six-year lease to Births, Deaths, and Marriages. The company concluded 10-year lease negotiations with Cash Converters Pty Limited commencing from October 2021. On the development front, GDI received approval for a ~9,000 sqm office building at Westralia Square. These developments support the profitability of the company, going forward. For FY21, GDI is expecting a cash distribution of 7.75 cents per security.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 GDI (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted negative 3-month and 6-month returns of ~14.57% and ~0.47%, respectively. It is currently trading slightly below the average of its 52-week high price of $1.300 and 52-week low price of $0.815. The stock slightly underperformed the market volatility index. We have valued the stock using the EV/EBITDA 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 as compared to its peer average EV/EBITDA (NTM Trading multiple) given the pipeline of long-term leasing projects and development pipeline. For this purpose, we have taken peers such as GPT Group (ASX: GPT), BWP Trust (ASX: BWP), Mirvac Group (ASX: MGR), to name a few. Considering its leadership position in Perth for office space, unused credit lines, valuation and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.055, up by 0.476% on 22nd March 2021.
3. Lendlease Group (Recommendation: Hold, Potential Upside: Low Double Digit)
(M-cap: A$ 8.95 Billion, Annual Dividend Yield: 1.40%)
The Pandemic Impacted Construction Revenues: Lendlease Group (ASX: LLC) is a property management company with a portfolio in infrastructure, defense, mixed-use, commercial, and residential assets. The pandemic impacted the company with a loss of $212 million in H2 FY20 as against a profit of $308 million in H1 FY20. Delay in projects, site shutdowns, and valuation declines in property assets eroded profitability. Despite the challenging environment, LLC secured projects with a development pipeline that increased by 48% to $113 billion in FY20. The sale of its engineering business is expected to be completed shortly with the sale price agreed at $160 million. It had launched Landlease Global Commercial REIT in Singapore. It had secured two urbanization projects valued at $37 billion. Project development EBITDA plunged 59%, while EBITDA from investment business deteriorated from $489 million in FY19 to $140 million in FY20. Overall EBITDA margin turned negative owing to modest growth in fees in its managed assets and delay in projects and cost overruns impacted profitability. It had devalued investments to the extent of $115 million in FY20.
LLC secured investments of $4 billion from its partners in its three urbanization projects. It had sold-off non-core assets, including telecommunication, engineering, and energy businesses, during H1 FY21. It had secured $2 billion multi-sector mandates in Australia. LLC has $110 billion projects under development. EBITDA from the construction business showed an uptick of 3%. Overall EBITDA margin improved to 3.7% in H1 FY21 vs. 3.3% in pcp. Gearing increased from 5.7% in FY20 to 12.9% in H1 FY21 due to inflows from borrowings. It had available liquidity of $4.7 billion as of December 2020.
Outlook: Growing number of urbanization projects to lift revenues in FY21. The company has a project pipeline of $110 billion with projects across the US and EU regions. The company is optimistic to achieve project conversion of $20 billion to revenues in the next three years to FY23. Construction backlogs revenue for the core business is expected to be $14.5 billion.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 LLC (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month positive returns of ~0.54% and ~9.71%, respectively. It is currently trading above the average of 52-week high price of $14.890 and 52-week low price of $9.500. The stock outperformed the market volatility. We have valued the stock using the EV/EBITDA 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 discount as compared to its peer average EV/EBITDA (NTM Trading multiple) citing its exposure to urban development projects which are sensitive to government regulations and macro-economic headwinds. Its international project pipelines may expose to geopolitical unrest. For this purpose, we have taken peers such as Cedar Woods Properties Ltd. (ASX: CWP), Peet Ltd. (ASX: PPC), APN Property Group Ltd. (ASX: APD), to name a few. Considering the project backlogs, improvement in profitability in H1 FY21, sound liquidity, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $13.110, up by 0.768% on 22nd March 2021.
4. Mirvac Group (Recommendation: Hold, Potential Upside: Low Double Digit)
(M-cap: A$ 9.52 Billion, Annual Dividend Yield: 3.22%)
Increase in Residential Settlements Mitigated the Pandemic Effects: Mirvac Group (ASX: MGR) provides real estate investment and development, funds management, and hotel management primarily in Australia. MGR experienced a 3% drop in net operating income from office and industrial portfolio. Its retail portfolio severely underperformed with a 24% drop notwithstanding the development completions in Toombul and South Village. Residential properties showed an uptick of 12% in net operating income led by apartment settlements. It had secured projects valued at $15.6 billion, representing ~27,000 pipeline lots for residential construction. In the office/ mixed-use projects, MGR committed $1.3 billion in FY20. Project written-offs, ECL provisioning, and residential settlement delays impacted overall profitability in FY20.
The re-opening of the stores improved retail segment operating income with +44% growth in H1 FY21 over pcp. Net operating income at office & industrial business grew by 4%, driven by the completion of projects. Its residential segment witnessed lower apartment settlements. It had completed 3 projects valued at $2.4 billion during the period. MGR executed 157 leasing deals and secured a residential pipeline of 1,171 lots. Its managed assets grew by 4% to $24 billion in H1 FY21 over pcp. Overall EBITDA margin improved to 34.0% in H1 FY21 vs. 30.1% in pcp. Liquidity appears to be adequate with cash balance and undrawn lines stood at $1.3 billion. It had no significant debt maturities until FY22 and beyond.
Outlook: MGR is on-track to release four new projects in the residential segment in H2 FY21. It is expecting to settle over 2,200 lots in FY21. MGR is projecting EPS growth of 13.1-13.5 cents per share for FY21 and DPS of 9.6-9.8 cents per share.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 3-month and 6-month returns of ~-6.84% and ~+18.93%, respectively. It is currently trading above the average of its 52-week high price of $2.840 and 52-week low price of $1.685. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA 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/EBITDA (NTM Trading multiple) citing its high exposure to office and commercial properties exhibited high vacancy rates and weak rental growth. For this purpose, we have taken peers such as GPT Group (ASX: GPT), Carindale Property Trust (ASX: CDP), ALE Property Group (ASX: LEP), to name a few. Considering the traction in retail properties portfolio, project pipeline, adequate liquidity, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $2.450, up by 1.239% on 22nd March 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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