Top Gainer: Commonwealth Property Office Fund (CPA)
In an otherwise bad day for the Aussie market, Commonwealth Property Office Fund was one of the few stocks that managed to post some gains, rising 3.8% to be the day’s top gainer on Thursday. The property fund is now up 14% since mid-April and flat for the year, down just 1%.
The catalyst for today’s gains was news that it had entered into an unconditional contract to sell its 259 George Street, Sydney asset for $395.0 million, a 15.3% premium to the asset’s 30 June 2011 independent valuation of $342.5 million.
CPA says that the sale proceeds will initially be used to retire debt, and is expected to reduce the Fund’s gearing by approximately 9%. “In the near term, we are considering a range of capital management initiatives for the best use of the sale proceeds including the potential payment of a special distribution, reinvestment into the Fund’s development pipeline or potential acquisition opportunities.” Charles Moore, Fund Manager of CPA said.
Today’s gains aside, at face value it’s hard to be bullish about listed property trusts (LPTs) – also known as REITs – within a rising interest rate environment that grants investors relatively risk-free returns of 7 per cent-plus on term deposits. With distributions still at the lower end of the range, REITs – expected to deliver an average gross return of around 9 per cent this year – have struggled to attract the sort of new money they did pre-GFC when returns were 20 per cent-plus.
But according to Winston Sammut managing director of Maxim Asset Management Ltd, there are sufficient drivers at play in 2011 to reward investors – who back the right stocks – with attractive double-digit returns. Year to date, the sector has been playing catch-up having delivered a price return of 3.59 percent – compared with 1.71 percent posted by the S&P/ASX 200.
Since exiting the GFC in considerably better shape, most stocks within the sector now have the ability to increase yields – nudging distributions back towards historical highs of between 80 to 90 per cent. They’re also better positioned to deploy buy backs to help close lingering discounts to NTA – indicatively between 10 and 33 percent. REITs that have already flagged their interest in on-market unit buy backs include Commonwealth Property Office Fund (CPA), GPT Group (GPT), Mirvac (MGR), and Charter Hall Retail (CQR).
Among the REITs most likely to deliver double-digit returns will be those primed for takeover within this year’s expectant flurry of corporate activity, according to Sammut. Having repaired their balance sheets, and refocused on the core business of collecting rent, conditions are now considerably more favourable for corporate activity this year.
Ratings agency Moody’s has also upgraded its outlook for REITs this year, and expects M&A activity to be a ‘net-positive’ as long as acquisitions aren’t disproportionately funded by debt. Gearings levels for the sector are back around 30 per cent, and excluding Westfield Group (WDC) would be considerably lower.
Based on substantial discounts to underlying net tangible asset base (NTA), plus a myriad of attractive metrics – including stable/secure yields, more contentious management, and better constructed balance sheets – David Curtis director with Reliance Investment management says many REITs now look like prime contenders for takeover.
Curtis questions how long high quality stable REITs like CFS Retail Property Trust (CFX) and Commonwealth Property Office Fund (CPA) can continue trading at discounts of 14 and 11 per cent respectively before they too are either taken out or consolidated by current owners. “I suspect there is sufficient M&A activity in store to provide a much needed re-rating to the sector at large,” says Curtis.
Based on Thomson Reuters data only one analyst has a buy on CPA, eight have holds and four have sells.
Chart: Share price over the year to 28/07/2011 versus ASX200 (XJO)
Stock code: CPA
More news: Commonwealth Property Office Fund Limited
Investor Centre: Commonwealth Property Office Fund Limited
Biggest Loser: Aquila Resources (AQA)
Down more than 30% over the last three months, Aquila Resources (AQA) was hit again today, falling a further 7.0% to be the day’s biggest loser.
The coal miner is currently pursuing legal action against its Isaac Plains coal mine joint venture partner, Brazil’s Vale, but the pair have resolved a dispute that threatened to close the operation. Ongoing problems with Vale over Isaac Plains, floods and issues with its Eagle Downs coal project have been identified as reasons to sell the coal miner by no less than five brokers on TheBull’s panel in recent months, who each have a sell on the stock.
John Rawicki of State One Stockbroking says that Aquila’s dispute with joint venture partner Vale over marketing of coal is expected to hurt profits, as will the Queensland floods. “We downgrade our full-year 2011 forecast to a $63 million loss,” says Rawicki. “We expect a $6 million loss in operating cash flow in the 2011 second half, compared with a $31 million profit in the 2011 first half.”
Warwick Grigor, BGF Equities agrees that conflicts between Aquila and joint venture partner Vale over project execution may impact the share price. “The problems executing the Eagle Downs coal project, and the marketing arrangements for the Isaac Plains coal mine may have a material effect on Aquila’s sales and performance,” says Grigor. :All these disruptions are causing severe price volatility and we see little upside in the short term.”
Two brokers from RBS Morgans, Nicholas Brooks and Simon Bond, have sells on AQA. Brooks believes that higher costs and capital expenditure have offset any increase in coal production. “We believe timing is also proving an issue at Aquila, where construction starts this year could see capital expenditure exceed its current cash position,” he says. “Too many headwinds. Sell.” Bond points out that the Isaac Plains coal mine was one of the hardest hit by the Queensland floods, which was reflected in the quarterly results. “We see risk in development timing, financing and capital expenditure relative to the company’s targets,” he says. “We move to a sell recommendation.”
James Cooper from Morningstar says that its profit doesn’t justify its market capitalisation. “Development of additional projects is required, but hurdles include project funding, cost inflation and weaker commodity prices,” he says. “AQA needs to rationalise its portfolio, resolve outstanding disputes and secure project funding, but progress to date has been slow.”
Based on Thomson Reuters data, three analysts have a buy on AQA, two have a hold, three have a sell.
Stock code: AQA
Charts: Aquila Resources Limited
More news: Aquila Resources Limited
Investor Centre: Aquila Resources Limited
Each trading day we will look at the top gainer and biggest loser for the day. Note that these are not recommendations to buy or sell, although we do include broker views on these stocks in the article.
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