EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: Mirvac Launches Opportunistic Equity Raise; Do Not Subscribe to SPP

Mirvac is raising AUD 750 million in new equity via an institutional placement and up to another AUD 75 million via a non-underwritten, retail security purchase plan, or SPP. The placement is priced at AUD 2.97 per security and the SPP is priced at AUD 2.90 as SPP securities won’t be issued in time to receive the upcoming AUD 6.3 cent distribution. We believe the stock is overvalued and recommend not subscribing to the SPP, which closes on June 25.

With its security price up about 35% in six months and at its highest level since early 2008, it’s an opportune time for Mirvac to raise equity and build firepower to fund property acquisitions and medium-term developments. Development focus remains mainly on office, industrial, and mixed-use projects. The highly priced equity raise has a positive impact on our fair value estimate, which increases 4% to AUD 2.50 per security. Our valuation was also helped by medium-term earnings upgrades to line up with new guidance.

Management marginally upgraded fiscal 2019 EPS guidance to the top of the prior range of AUD 16.9 to AUD 17.1 cps and provided guidance of at least 2% EPS growth in fiscal 2020. If it wasn’t for dilution from the equity raising and asset sales, EPS would be up an impressive 8%. This is significantly better than the 1% EPS fall we were previously expecting in 2020, and we upgrade our forecast in line. Management also provided guidance for passive earnings from investment properties to grow around 5% per year to fiscal 2021, with distributions to investors following in line.

Near-term conditions for the residential development business turned more favourable with the Liberal win in Canberra, the Reserve Bank of Australia hinting at interest rate cuts and banks planning to relax lending standards, but a residential downturn is still on the cards at some stage over the next few years. This is the main driver of our forecast for Mirvac’s earnings to fall modestly from fiscal 2021.

Following the placement, gearing will fall to 19% from 24.4% in December 2018. We like conservative gearing, particularly this late in the cycle. Gearing will rise as Mirvac debt-funds new developments, though the firm can delay unstarted projects if market conditions deteriorate. Net tangible asset backing also improves, up 1% to AUD 2.47 per security.