EUR 850.00 For Business Accounts Only

Morningstar | Mirvac Well Aligned with Buoyant Office and Industrial Sectors. FVE Increases 7% to AUD 2.25

Mirvac Group’s reported first-half fiscal 2019 operational earnings of AUD 290 million or AUD 7.85 cents per security were up 27% on the previous corresponding period, or pcp, nearly entirely attributable to an AUD 87 million lift in pretax development earnings. Guided growth in fiscal 2019 earnings per share tightened slightly to 3%-4% growth from 2%-4% previously. The major business activities of office ownership and development are performing better than expected. Office rents have continued their upward trajectory, supported by acute supply shortage in both Sydney and Melbourne.

The fall in long-term bond yields has added support to asset values and hence medium-term profits from the developments progressing through construction and planning. We’ve raised our rental growth assumptions for the office portfolio, that represents 49% of balance sheet assets. Our view is supported by the sustained low vacancy in the Sydney office market. Mirvac advised Australia-wide office leases struck during the six months to December, faced rent jumping 6% for renewed leases and 19% for new leases. Upfront incentives paid to tenants were 16% on average, as compared with 22% for the year to June 2018.

We’ve slightly raised profit expectations for the pipeline of commercial office and industrial facilities as Mirvac has made good progress on derisking developments through tenant precommitments. Our fair value estimate for no-moat-rated Mirvac increases 7% to AUD 2.25. Mirvac screens as overvalued, currently trading around AUD 2.55, a 10-year high. The guided fiscal 2019 distribution of AUD 11.6 cps, represents a yield of 4.6% at current levels.

We like the business strategy laid down by CEO, Susan Lloyd-Hurwitz, to focus capital on the larger Australian east coast cities. We agree the larger economic hubs benefit from superior population growth and hence a deeper pool of tenant demand. Overall, we believe this, combined with a focus on newer high amenity premises, will result in superior long-term occupancy and hence lower-risk cash flows.

It would seem the investment community generally is ascribing too much weight to the current extremely buoyant economic conditions and discounting the possibility of a period of economic contraction that will impact demand for office space and also weigh on residential values. Our caution mainly stems from the highly unusual economic forces in play of ultra-loose monetary policies and highly stimulatory fiscal policies. Against this backdrop, we are reluctant to recommend investors deploy capital to asset classes--particularly office--where gross yields are around 5%, the lowest they have ever been.

Dwelling prices in Sydney and Melbourne have fallen between 10%-15% over the past 18 months. The financial services Royal Commission is perhaps the major reason, with banks now coerced into lending more responsibly. We were particularly pleased to hear Mirvac continues to stand on the sidelines and wait for further price declines before acquiring more residential land sites. This makes senses as dwelling prices are still high relative to incomes. Our best estimate is dwelling prices retrace a further 5% to 10% then track broadly sideways for perhaps five years, providing an opportunity for households to deleverage and incomes to rise relative to prices. If Mirvac remains patient, it is likely to be able to restock its land bank on the cheap, scooping up sites from distressed developers. Australia remains a very attractive place to live in a global context, with high quality of life.

We view the fall in Australian housing approvals as a short-term negative, but a long-term positive for Mirvac. Assuming the Australian population continues to grow around 1.5% annually, it will accentuate the housing shortage, making it easier for Mirvac to market and sell apartments and land in outer years. We think Mirvac’s strategy on focusing on the major cities of Melbourne, Sydney and Brisbane and apparent discipline in acquiring sites support long-term shareholder value creation.