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Stock: Stockland
Code: SGP
Market Cap: $4.8 bn
Recommendation: Initiating Coverage

Interest rates have been falling, stimulus packages have been flowing and first home buyer grants have hit the scene. Surely then, for a property stalwart like Stockland (ASX Code: SGP), this would have meant a better outcome than the one recently reported?…

Stockland has been around since the early 1950s and was officially listed in 1957. Today, it is one of the top 50 ASX companies by market cap, and one of Australia’s largest, most diversified property groups. In fact, it is the second biggest property trust behind Westfield and has around $30bn worth of assets under management.

Despite this pedigree, reputation has not spared the company from the woes plaguing the sector. Asset values have continued to plunge and contrary to what investors might be aching to hear, the famous words ‘market bottom’ have not entered any popular discussions about the property market. Yesteryear’s images of burgeoning ‘bricks and mortar’ moguls have been reduced to rubble, and companies like Stockland don’t appear to be out of the woods just yet.

In keeping with the sector’s recent trends, Stockland has issued a hefty profit downgrade for FY09 and flagged its first reduction in dividends since 1983. Although it has avoided temptations that brought the likes of Centro and GPT to their knees, the company did fall into the trap of expanding away from our shores at the height of the property market in 2007. Assets associated with the £215m acquisition of UK based Halladale Group Plc have thus far been written down by 40%, and management have run out of superlatives to describe the dire state of that market. Luckily for Stockland, these UK assets form only a small part of its overall portfolio.

The Australian residential market, although faring better than some of its international counterparts, has also been a primary source of woe. In total, $280m worth of write downs have been taken on Stockland’s residential portfolio for the full year, adding to the $120m in writedowns from the UK business. The total estimated $400m loss to book value has resulted in revised EPS guidance of around 10c, down from previous guidance of 31.8c. This equates to almost a 70% decrease in forecasted earnings from the previous guidance provided!

Due to the trauma still engulfing the sector, management are now taking a ‘back to basics’ approach, revising the company’s distributions policy with the first dividend cut in over 25 years. Adding to the shock of the reduction is the possibility that dividends will now be allowed to fluctuate with earnings. No longer will the company supplement leaner earnings years with borrowings in order to prop up dividends. Rather, payouts will rise and fall in line with profitability.

Prior to the collapse of global equity and property markets, one of the main attractions of property stocks had been their reliable source of dividend income in addition to capital gains. With this formula shot to pieces in the past 18 months, investors have been forced to reconsider their investment strategies. The de-leveraging process that the industry has had to undergo is not necessarily a bad thing, and with most players heading ‘back to the drawing board’, the lessons learnt should help prevent the same mistakes being made in the future.

With this in mind, the more pertinent questions occupying investors are: Does the current mayhem offer long-term entry points in Stockland? And do current levels represent ‘bargain-basement’ prices?

Stockland reached all-time highs of $9.38 at the end of 2007 but collapsed to all-time lows just this year of $2.07. The stock remains in a primary downtrend as does the likes of other industry flag-bearers, Westfield and GPT. What this tells us is that the capitulation of the property sector has not been an overnight occurrence but rather the economic downturn has eaten away at asset values at a continual pace. With the share price performance of property trusts heavily tied to the value of the bricks and mortar they own, the ‘ultimate’ goal is in predicting when a turnaround may begin to unravel. It is important to note that the sharemarket is forward-looking in nature and share prices will lead any recover in underlying asset values.

Speaking of asset prices, Stockland’s estimated 30 June 09 NTA of $4.10 is around 20% above the current share price. Although this could be indicative of value, share price discounts to net tangible asset (NTA) backing are not uncommon in the property sector these days. Is this the result of a temporary mispricing? Or have NTAs become an unreliable basis for the making of quality investment decisions?

For investors looking to participate in any future rebuild of listed property stocks, a deeper understanding of their real share price drivers may be required. For the moment uncertainty prevails. Stockland’s announcement has failed to rekindle lost confidence in the sector, but when the tide does turn, big rewards may be available for those wise enough to catch first wave in.

Joshua Terlich is an analyst at wise-owl.com, one of Australia’s leading independent stockmarket research houses. Click here for your complimentary report.

 

 

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