A glimpse of the commercial property market can be seen in what is happening with Stockland. The company cut its FY12 earnings per share guidance by 4.4%, blaming the combination of a recent deterioration in the residential market and wet weather in the Illawarra region of NSW. But it is claiming its commercial property and retirement living businesses are performing in line with expectations. If about half the downgrade is due to weakness in the residential market, the implication is that Stockland’s residential sales are down by over a quarter, with possibly more to come. Macquarie has a neutral recommendation and a price target of $3.22: It is a bearish assessment given the stock is on an earnings multiple below 10 times and a dividend yield of about 8%:
As expected, the increase in mortgage rates in February has had a negative impact on the residential market, which has been a key factor underpinning our ongoing caution on the performance of the resi developers in 2H12. SGP’s revised guidance “assumes sales will continue to be slow for the balance of the financial year” although we continue to highlight that soft market conditions can also adversely impact the results from the retirement business which, at this stage, SGP have said is performing in line with expectations.
Merrill describes the downgrade as a dose of reality:
SGP has previously utilised a range of levers, e.g. super-lots, settlement timing, to at least meet guidance. Today’s downgrade impacts this reputation & highlights the bet SGP is placing on the consumer with its “3R” strategy. Absent
interest rate cuts, we see few near-term catalysts for SGP. While valuation is undemanding at 19% discount to NTA & 8% yield, we see little to drive near-term outperformance & downgrade from Buy to Neutral. Mirvac remains our preferred residential play.
Deutsche thinks the downgrade is priced in and has a buy:
SGP’s downgrade assumes softened market conditions observed since Feb-12 continue for the remainder of FY12 (0.7cps), which if annualised would equate to a ~6% FY13 EPs downgrade on our ests. However, at Dec-11 SGP was carrying 412 contracts on hand that are due to settle in FY13, which should provide a partial offset to softer underlying CY12 conditions. Our 5% EPS forecast cut reflects settlement of such contracts, in addition to FY buyback accretion & stabilization of retail developments.