6min read
PREVIOUS ARTICLE How to bet on a resources reco... NEXT ARTICLE 2 Cyclical Stocks Set for Soli...

A key column theme this year has been to buy property-related stocks. I wrote in early 2013 that record-low interest rates and the prospect of more rates cuts would boost demand for established homes and send prices higher. Sydney property is booming, and other markets are strengthening.

The column identified emerging property-information stocks such as Nearmap and OnTheHouse Holdings; furniture retailer Nick Scali; and then second-tier banks Bank of Queensland and Suncorp. Sunland Group was also identified for its leverage to Queensland property.

Over the year to October 31, 2013, Nearmap has increased more than tenfold; OnTheHouse has a total shareholder return (assuming dividend reinvestment) of 18 per cent; Nick Scali is up 133 per cent; Bank of Queensland is up 69 per cent; Suncorp has delivered 51 per cent; and Sunland has posted a one-year total shareholder return of 60 per cent.

These returns make one wonder why so many people buy investment properties, when a small portfolio of well-chosen property stocks can provide returns of more than 50 per cent over 12 months, with a lot more liquidity compared with owning a single property.

Impressive as they are, these gains are only paper profits. Just as important is knowing when stocks become overvalued, so that profits can be taken to lock in gains. All the stocks above look fully valued, but they can still trend higher in the next 12 months, albeit at a slower pace.

My base case is the residential property market has further to run in the next 12 months. Another interest-rate cut this year seems less likely due to slightly higher inflation, but the stubbornly high Australian dollar could still force the Reserve Bank to cut rates again early next year.

Even if it does not, it is hard to see the official cash rate heading higher anytime soon. More likely is Australia’s record-low interest rates remaining that way for a big chunk of 2014, which in turn will encourage more people to buy a home, seek property information and finance, and drive prices higher.

In my view, constant debate about whether Australia will experience a property boom and inevitable bust misses the point. A steady, sustainable recovery in property demand – as seems the case in capital-city markets, with the exception of Sydney – is ideal for property-related stocks.

I particularly like the prospects for the second-tier banks. They are strongly leveraged to a strengthening residential property market, and Bank of Queensland and Suncorp have the added appeal of high exposure to an improving South-East Queensland property market. Moreover, the second-tier banks are a lot less speculative than property stgelopers and information providers.

Bank of QLD (BOQ)

Chart: Share price over the year to versus ASX200 (XJO)

The big question is valuation. After stellar gains this year, Bank of Queensland has quickly exceeded Bell Potter Securities’ $11.60 price target over 12 months. Some might see that as a signal to sell, but Bank of Queensland has plenty of momentum.

Having called Bank of Queensland beautifully this year, Bell Potter wrote in October: “Despite a slow credit-growth environment, we believe management has effectively dealt with some significant legacy issues while enhancing earnings sustainability. The latter is expected to come from strong top-line growth, ongoing productivity and efficiency gains, and maintenance of strict credit-risk discipline. As such, we believe there is a strong probability that BOQ will exceed its 2015 management targets.”

Suncorp (SUN)

Chart: Share price over the year to versus ASX200 (XJO)

Bell Potter also has a buy call on Suncorp and a 12-month price target of $14.50. The current price is $13.37. It notes the strong correlation between Suncorp’s dividend payout ratio and share price and suggests the trajectory of expected dividend growth could lead to a $16 share price by 2015. “We also see a further round of PE re-rating from de-risking the current portfolio,” wrote Bell in late October.

Suncorp’s expected 6.1 per cent fully franked dividend yield in 2014-15, according to consensus analyst forecasts, and the prospect of more capital returns, are also attractive.

Bendigo and Adelaide Bank (BEN)

Chart: Share price over the year to versus ASX200 (XJO)

Another second-tier bank worth following is Bendigo and Adelaide Bank. It has returned 47 per cent over one year (including dividends) after strong gains in October. Bendigo probably has less upside than Bank of Queensland or Suncorp, but is well run and has performed steadily.

Like the other banks, it could be tested in a slowing credit-growth environment, and looks fully valued after recent share-price gains. Yet further gains over 12 months are possible as the market accelerates, the economy slowly improves, and yield stocks remain in focus. And for all the growing negativity about high valuations, it is still hard to bet against bank stocks in 2014. Solid profits from ANZ and National Australia Bank, reported this week, confirm the sector is in good shape.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at October 31, 2013.