Stocks’ Details

Rural Funds Group

Focus on Debt Repayment: Rural Funds Group (ASX: RFF) is an agricultural real estate investment trust that owns a diversified portfolio of Australian agricultural assets. The market capitalisation of the company stood at ~A$614.62 Mn as on 19^th November 2019.As responsible entity for the Rural Funds Group, Rural Funds Management Limited (RFM), through a release dated 28^th October 2019 announced that it has entered into agreements for the sale of RFF’s poultry assets in consideration of $72.0 million to ProTen Investment Management Pty Ltd as trustee for ProTen Investment Trust, which is subject to certain conditions. The funds realised from the sale of these infrastructure assets and associated plant and equipment, would be initially utilised to repay debts.


Key Financial Metrics (Source: Company Reports)

What to Expect:The company expects distributions amounting to 10.85 cents per unit for FY20. However, it anticipates AFFO to be 13.4 cents per unit for FY20, reflecting a payout ratio of 81%. RFM would operate and lease Mayneland in FY20 to enable the development of unutilised water entitlements and to improve economies of scale which would make the asset more financially attractive to third party lessees.

Stock Recommendation:Responsible Entity Rural Funds Management Limited also entered into options for acquiring three cattle properties: Petro, High Hill and Willara, in consideration of $22.6 million, inclusive of estimated transaction costs. On the valuation side, RFF has EV to sales multiple of 13.1x as compared to the industry median (Residential & Commercial REITs) of 15.4x on TTM basis. The stock is trading at a price to cash flow multiple of 13.5x against the industry average (Residential & Commercial REITs) of 19.8x on TTM basis. In the span of last one month, the stock provided a return of 2.23%. Current ratio stood at 0.48x in FY 2019, which is broadly in-line with the industry median of 0.47x. Debt/Equity ratio stood at 0.56x in FY 2019. Thus, considering the aforesaid facts coupled with decent liquidity position and current trading levels, we maintain our “Hold” rating on the stock at the current market price of A$1.885 per share, up 3.005% on 19^th November 2019.  
 

Home Consortium

Employee Equity Plan:Home Consortium (ASX: HMC) is an internally managed property group, which is focused on ownership, development and management. The market capitalisation of the company stood at ~A$771.46 Mn as on 19^th November 2019. The company recently announced that Home Investment Consortium Company Pty Ltd as trustee for the Home Investment Consortium Trust has become an initial substantial holder in the company on 16^th October 2019 with the voting power of 47.6%.

Recently, the company has employee equity plan, which allows the Board of Directors to offer awards to employees which provide the opportunity to acquire securities for the purpose of (1) attracting, motivating and retaining employees, (2) rewarding employees for achieving individual and Group performance, (3) aligning the interests of employees with those of securityholders, and (4) facilitating conduct and good risk practices via the use of clawback and malus provisions.

The following picture provides an idea of segment information for the year ended 30^th June 2019:


Segment Information (Source: Company Reports)

Future Aspects:HMC’s growth outlook in funds from operations per security and dividends would be supported by mainly fixed rental reviews in its leases, future income from centres to be redeveloped and organic growth opportunities within the underlying asset portfolio.HMC would maintain a capital structure with a target gearing in the ambit of 30% to 40% and the initial gearing of 31.8% at completion.

Stock Recommendation:On the valuation side, HMC has EV to Sales multiple of 28.0x in comparison to the industry average (Financials) of 10.5x on TTM basis. The stock of HMC provided returns of 2.63% in the last one month. As per the ASX, the stock of HMC is trading closer to its 52-week higher levels of A$3.970. Since the stock has recently been listed on the exchange, we are constrained with details of financials and other important information. The stock is trading close to its 52-week high levels of $3.970. Therefore, we have a wait and watch stance on the stock at the current market price of A$3.900 per share on 19^th November 2019.
 

Arena REIT

Distribution of 3.575 Cents Per Stapled Security: Arena REIT (ASX: ARF) owns, manages and develops social infrastructure properties throughout Australia. The market capitalisation of the company stood at A$858.07 Mn as on 19^th November 2019. The company would be conducting its 2019 Annual General Meeting on 22^nd November 2019.  ARF on 20^th September 2019 announced a distribution of 3.575 cents per stapled security for the quarter ended on 30^th September 2019. The distribution is in line with ARF’s previously announced FY20 distribution guidance of 14.3 cents per security. The below picture provides an overview of components of the distribution:


Components of Distribution (Source: Company Reports)

Future Aspects:As per 2019 annual report, ARF’s outlook is positive, and its portfolio remains in a strong position, which is primarily supported by (1) 100% occupancy, (2) long term predominantly triple net leases with minimum annual rent escalations, (3) market rent reviews scheduled for FY20 and FY21, (4) annualisation of FY19 development completions, and (5) debt capacity to execute on selective new investment opportunities.
Stock Recommendation:ARF is focused towards maximising the quality of the portfolio and sees opportunities to enhance existing properties for an increased return, to acquire and develop new high-quality assets and sell assets which no longer meet investment criteria. When it comes to valuation, the stock of ARF is trading at a price to cash flow multiple of 20.7x as compared to the industry median (Financials) of 14.2x on TTM basis. It has EV to EBITDA multiple of 22.2x against the industry median (Residential & Commercial REITs) of 20.3x on TTM basis. The stock of ARF experienced a rise of 15.32% on YTD basis and 25.44% in the span of one year. As per the ASX, the stock of ARF is trading towards its 52-week higher levels. Thus, considering the aforesaid facts coupled with stretched valuations and current trading levels, we recommend an “Expensive” rating on the stock at the current market price of A$2.920 per share, up 2.098% on 19^th November 2019.
 

Lendlease Group

Notice of 2019 AGM:Lendlease Group (ASX: LLC) operates in the Asia Pacific, Europe, and the Americas regions in the areas of retail property management, asset management and development. The company recently announced that Morgan Stanley and its subsidiaries have become an initial substantial holder in the company on 14^th November 2019. The company has scheduled to conduct its 2019 Annual General Meeting on 20^th November 2019. When it comes to financial performance, the group remains in a decent financial position with gearing of 9.9%, which is at the bottom of the 10-20 per cent target range, and $3.9 billion of available liquidity in a challenging year.


Financial Performance (Source: Company Reports)

What to Expect:The cornerstone of the LLC’s strategy is to create the best urban precincts in key global gateway cities. The company is focused on leveraging its competitive advantage through integrated model, urbanisation and investment platforms. LLC is well placed for the next phase of investment for growth with substantial capacity to finance the development pipeline.

Stock Recommendation:During FY19, LLC added three major urbanisation projects to its pipeline in the cities of Milan, Chicago and Sydney. Following the balance date, LLC also secured an urbanisation project in the San Francisco Bay Area. The 4 projects have a combined estimated end development value of around $27 billion, strengthening the Group’s position as the global leader in transforming urban precincts. Debt to Equity ratio of the company stood at 0.43x in FY19 as compared to the industry median of 0.70x. LLC has EV to sales multiple of 0.8x against the industry median (Real Estate Operations) of 5.2x on TTM basis. LLC has EV to EBITDA multiple of 12.3x as compared to the industry average (Real Estate Operations) of 19.3x on TTM basis. Therefore, considering decent outlook, valuation parameters, CAGR return of 5.64% in total revenue over the period of FY15-FY19, stable balance sheet and visibility of the future earnings, we give a “Hold” recommendation on the stock at the current market price of A$19.850 per share, up 1.899% on 19^th November 2019.

 
Comparative Price Chart (Source: Thomson Reuters) 

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