Stockland

SGP Details

Strategic Capital Partnership with CPG: Stockland (ASX: SGP) has recently announced a strategic capital partnership in its residential portfolio, with Capital Property Group (CPG) investing a 50 per cent interest in Stockland’s largest master-planned community, Aura on the Sunshine Coast, at around 30 per cent premium to book value.CPG will invest alongside SGP to continue the creation of an outstanding new city on the Sunshine Coast, combining affordable homes, retail town centres and business parks alongside best in class schools, child care, sporting facilities, transport, open space and community infrastructure. This partnership is expected to help SGP in strengthening its balance sheet and invest in other growth opportunities across its diversified portfolio, including its workplace and logistics development pipeline and additional residential community acquisitions.

In another update, SGP announced that Legg Mason Asset Management Limited and its bodies corporate, became the substantial holder to the company with 5.03% voting power, effective from June 26, 2019. On June 17, 2019, SGP announced an ordinary dividend of AUD 0.1410 per security, for which, the ex-date was June 27, 2019 and payment date is August 30, 2019.

H1FY19 (ended on December 31, 2018) Key Highlights: The funds from operations (FFO) was reported at $407 Mn, which is a decrease of 6.7% as compared to the previous corresponding period, reflecting residential profit skew to H2FY19. Statutory profit decreased by 56.2% on pcp to $300 Mn, reflecting losses on financial instruments, reduced commercial property valuation increases relative to 1H18, retirement living fair value changes and a tax expense.



H1FY19 Key Financial Metrics (Source: Company Reports)

What to expect: The group is targeting funds from operations (FFO) per security with growth of ~5% for FY19. Under residential segment, the operating profit margin is expected above 18% for the full year. Under retirement living, the company plans for the non-core village divestments. Under commercial property, the comparable FFO growth is expected to be ~2%. Its FY19 distribution is expected at 27.6 cents per share (a growth rate of 4%), which is at the bottom end of the target payout ratio of 75%-85% of FFO. Moreover, the company expects that Residential settlements would be around 5,900 for FY19 due to production delays at Mt Atkinson (Melbourne), deferred to FY20, and extended settlement timeframes.

As per the media release, the Australian Prudential Regulatory Authority (APRA) confirmed that its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Instead, authorised deposit-taking institutions (ADIs) will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate. This development would enable ADIs to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.

Stock Recommendation: On the margin front, gross margin and EBITDA margin for H1FY19 stood at 47.5% and 35.8%, which are better than the prior corresponding period of 43.2% and 27.9%, respectively, indicating improving financial performance on a pcp basis. Moreover, on the valuation front, EV/Sales and Price to Book multiple for TTM stand at 5.3x and 1.0x, which are lower than the industry median of 16.4x and 1.2x respectively, showing an undervalued position at the current juncture. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating to the stock at a current market price of $4.400 per share (down 1.345% on July 8, 2019).


SGP Daily Chart (Source: Thomson Reuters) 

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