Mirvac Group Ltd (MGR) – BUY
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Financials||52-Week Range: A$2.005 – 2.54|
|Industry: Real Estate||Market Cap: A$8,757.7m|
We rate MGR as a Buy for the following reasons:
- High quality portfolio composition with stronger weighting towards Melbourne and Sydney minimizing risk from submarket weakness from Brisbane.
- MGR has delivered 3,400 lot settlements in FY18 (driving greater passive NOI) and has 60% of FY19 residential EBIT already secured.
- Strong pipeline of residential projects to come, delivering earnings growth by FY20/FY21.
- Solid balance sheet. Gearing at an all-time low of 21.3% and is at lower end of target range of (20%-30%).
- Potential recovery in weak retail sales especially for supermarkets.
- Strong management team.
We see the following key risks to our investment thesis:
- Deterioration in property fundamentals for Office, Industrial and Retail portfolio, such as delays with developments or lower than expected rental growth causing downward asset revaluations.
- Tenant defaults as economic landscape changes (increasingly competitive retail sector). For instance, retailer bankruptcies causing rising vacancies in retail portfolio.
- Residential settlement risk and defaults.
- Potential rate hikes in 2018 to come affecting bond-proxy stocks and their yield and debt books.
- Consumer sentiment towards impact of higher interest rates and effect on retail and residential businesses.
Figure 1: : Breakdown of MGR earnings (EBIT)
MGR’s FY18 operating profit (after tax) of $580m was up +8% on prior year and came in ahead of consensus estimates of $577.2m. The Company provided FY19 operating EPS target of $0.168 – 0.171 and distribution target of $0.116 (which is in line with current consensus estimates).
Operating profits after tax increased by +9% to A$580m, largely driven by strong performance in Office & Industrials (EBIT up +19% from the previous year to A$381m with strong occupancy rates (97.5%) coming from solid net absorption in a tighter lending market). Retail segment earnings were flat with EBIT of A$154m. MGR’s Residential business fulfilled full year targets and delivered gross development margins of 25.4%.
MGR continues to maintain a rigorous capital structure with gearing at 21.3% – in the lower end of management targets of 20-30%. On the analyst call, management sees FY19 operating EPS to grow 2-4% (16.8-17.1cpss) and DPS guidance of 5% growth to 11.6cps over FY18. Management also expressed confidence in maintaining gross margins at ~35% above through-cycle 18-22% and a lower ROIC at ~18%. MGR currently trades on reasonable valuations, 14.7x PE19, 3.7% dividend yield.
- Office and Industrial business (~46% of EBIT). On property portfolio fundamentals:
1. Occupancies: Office – 97.5% down slightly from 97.6% in the previous year; Industrial – 100% up from 95.3% in from the previous year.;
2. Cap rates: Office – 5.69% down from 5.92 at FY17; Industrial – 6.19% down from 6.37% at FY17.
3. WALE: Office – 6.6 years, up from 6.5 years at FY17; Industrial – 7.1 years up from 7.0 in the prior period. We note $60m of potential additional annual NOI and >$160m potential development EBIT to be delivered by the active development pipeline by FY21
- Residential outlook sturdy (~36% of EBIT). MGR fulfilled guidance in completing 3,400 settlements in FY18 despite flat EBIT of A$300m (compared to FY17). The segment secured strong pre-sales of $2.9bn with 72% of settlements driven by the Sydney and Melbourne markets. A$2.2bn of pre-sales are on hand and 60% of residential EBIT have also been secured for FY19, indicating good visibility of future earnings, this stability supported by the high level of apartment project pre-sales (83%), already presold out to FY21. Regarding trends in residential conditions, MGR highlighted market moderation amidst signs of improved buyer sentiment and long term demand amongst owner-occupiers from strong population growth in Sydney and Melbourne. Tighter lending conditions have also led to a reduction in competition. Management also notes that strategic overweight to Melbourne MPC (currently benefitting from strong population growth, relative affordability, employment strength and strong major infrastructure initiatives) may negate any weak submarket residential condition risks in Brisbane.
- Retail segment dips despite like for like NOI growth (~18% of EBIT). Retail saw a decrease of -1% in FY18 EBIT to A$154m, despite seeing like-for-like NOI growth of 3%. Occupancy rates slightly decreased to 99.2% (from 99.4 in the pcp). In terms of MGR’s tenants, MAT sales growth reached 3.1%, with comparable specialty sales growth of 3.7%.
- Maintained strong balance sheet and robust cash flow. Gearing of 21.3% is at the lower end of Management’s 20-30% target range and weighted average debt maturity was up from 6.2 years to 6.8 years. 77% of MGR’s debt is currently hedged, and A$906m of cash and undrawn committed debt facilities gives MGR both flexibility and security against unexpected headwinds. NTA rose $2.31 from $2.13 in FY17 (driven by revaluations – uplift of $487.7 million for the 12 months to 30 June 2018 and development completions).
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MRG FY18 RESULTS SUMMARY
Figure 2: : MGR FY18 Results summary – By Segments
Figure 3: MGR Financial Summary
Mirvac Group Ltd (MGR) is a real estate investment and development company. The company operates in Office and industrial, Retail and Residential space within the real Estate sector. Mirvac Group Ltd is headquartered in Sydney, Australia.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
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