Thursday, September 6th, 2018
With origins in the 1950s, Stockland (ASX:SGP) has grown to become one of the largest diversified property groups in Australia.
SGP owns, manages and develops a wide range of real estate assets including shopping centres, logistics centres, business parks, offices, residential communities and retirement living villages.
SGP has long attracted investor interest for its solid mix of passive income-producing properties held within its trust, coupled with the more active earnings from its corporation.
About 70 per cent of the group’s assets are in the trust, which owns retail malls, offices, logistics centres and business parks. The rest support the large-scale development of residential and retirement living properties.
Recent full-year results were sound, building on the solid record of previous years. SGP guided to growth in FY19 cashflow per security of five to seven per cent and a distribution per security of 27.6 cents.
While there is an oversupply of apartments in some suburbs, SGP emphasises the development of affordable detached, medium-density housing for first home buyers and owner-occupiers. Due to population growth and state government incentives for first home buyers, this part of the residential market is proving more resilient to regulatory controls on bank lending to investors and interest-only mortgage borrowers. As property prices cool, there is a flight to quality in housing markets which benefits SGP. Target FY19 residential settlements of ~6,000 lots including 400 town homes are lower than FY18 but this should be offset by higher prices. 75% of buyers are owner-occupiers, which reduces exposure to the declining investor segment. Operating margins are expected to rise to ~18% in FY19.
SGP’s retail sales grew 3.4 per cent over the year, an improvement due to better specialty sales. Retail conditions are challenging, especially in areas with subdued economies, however services, food, lifestyle, mini-majors, entertainment and leisure offerings continue to perform well and are the focus for SGP’s remixing of its malls. SGP will also deweight retail in its portfolio.
The retirement living business took a hit in FY18 from the Aveo controversy but should have a better year in FY19. The fourth quarter saw a 15 per cent increase in sales above the previous corresponding period. Between improved turnover of existing units plus new development sales, retirement earnings should improve in FY19.
Investors who need consistent, reliable income should prefer strong balance sheets and conservative dividend payout ratios. SGP’s gearing is just 22 per cent with a weighted average debt maturity of 6.2 years and a declining cost of debt. The forecast FY19 payout of 75 per cent is at the lower end of the 75-85 per cent target range.
Over many years SGP has proved itself a consistent performer that has paid an attractive stream of biannual distributions. At current prices the stock offers a yield of 6.5 per cent, which should be of interest to income investors. Compare this with term deposit rates of 2.5 per cent. In our view the business is worth over $4.50 per share.
Clime owns shares in SGP.