Top Gainer: Stockland (SGP)
Merrill Lynch – Compelling Buy
Citi – Buy, Medium risk
Stockland has certainly fallen out of favour with investors and is down 26% in the past four months alone. In fact the whole REIT sector has been feeling the pinch, with Charter Hall, Cedar Woods and FKP sporting similar losses. Today saw a turnaround at long last for SGP investors, as it climbed 5.5% to be the day’s top gainer. Amid the market chaos last week it reported that net profit for 2010/11 was $754.6 million, up 57.7 per cent from $478.4 million in the prior year, however with a weak outlook for property the future doesn’t exactly look bright. Unless of course there is a takeover bid for the company.
Just last month several analysts identified that with many players within the sector trading at a discount to Net Tanglible Assets (NTA), several of the companies may well be subject to a takeover bid. With share prices having fallen even further we may well see some M&A activity in the second half of 2011.
Based on substantial discounts to underlying NTA, plus a myriad of attractive metrics – including stable/secure yields and better constructed balance sheets – David Curtis director with Reliance Investment management says many REITs now look like prime contenders for takeover. Charter Hall Office (CQO) is now regarded as the next REIT destined for privatisation following the 20 per cent stake taken by three US hedge funds that are calling for the current manager to be dumped.
Thematics are currently against residential assets, but Curtis says FKP Property Group’s (FKP) 43 percent discount to NTA could still make it attractive to existing shareholder Stockland (SGP) which has first rights to its retirement assets. Given that it typically trades at a premium to its NTA, Curtis says Stockland – currently discounted by around eight per cent – could also make for a potential takeover target. “I suspect there is sufficient M&A activity in store to provide a much needed re-rating to the sector at large,” says Curtis.
Winston Sammut, Managing director, Maxim Asset Management believes that rather than purely chasing yield, investors should be trying to ascertain where the value will be extracted within the next 18 months and beyond – especially on the back of corporate activity. Sammut says that Stockland’s strategy of concentrating on the three Rs of property retirement, retail and residential investments – has paid off with the residential sector performing particularly well, notably in Sydney and Melbourne. “It has a good pipeline of projects, a strong balance sheet and long dated debt,” he says.
Brokers Citi and Merrill Lynch are certainly bullish on SGP, with Merrill Lynch placing a “compelling buy” rating on the stock. Meanwhile Citi’s buy has a “medium risk” label attached to it.
Based on Thomson Reuters data, eight analysts have a buy on SGP, two have a hold, one has a sell.
Chart: Share price over the year to 16/08/2011 versus ASX200 (XJO)
Stock code: SGP
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