EUR 850.00 For Business Accounts Only

Morningstar | Lower Interest Rates Driving BWP Share Price Gains, FVE Unchanged

We think historically low interest rates are driving no-moat BWP Trust’s recent share price gains. An update from management prompts no material changes to our view on the company’s fundamentals. Consequently, our fair value estimate remains AUD 3.30 per share. We expect what has changed is the broader macroeconomic outlook on interest rates. The Reserve Bank of Australia, or RBA, cut the cash rate by 25 basis points earlier in 2019. There is also growing consensus it will do so again at least one more time later this year and potentially again in 2020. Australia’s 10-year government bond rate now trades at a historically low rate of about 1.4%. This compares with our forecast fiscal 2019 dividend yield for the trust at our fair value estimate of 5.4%.

Investor demand for recurring income streams is likely to be the cause for the trust’s recent share price appreciation. Lower interest rates make investment in stable-yielding assets, such as BWP, more attractive. However, we think BWP is moderately overvalued at current prices. At BWP’s current price of AUD 3.78 per share, the yield difference of about 3.4% between the trust’s fiscal 2019 yield of 4.8% and the Australian 10-year government bond yield of 1.4% is generally in line or slightly higher than where this differential has traded in the last three years. However, if the Australian 10-year government bond was to revert to where it traded only about six months ago, a still historically low 2.5%, the yield differential of about 2.3% would be lower than where its generally traded over the last three years at BWP's current share price. Consequently, we think the current historically low interest rates will need to persist to drive further share price gains.