On track in F18
In its fiscal third quarter update diversified property company Stockland (ASX:SGP) reaffirmed profit growth guidance for the year ending June, with the company “on track” due in part to continuing positive residential market conditions and improving retail sales growth. Stockland has also continued to make strategic asset sales and will build its first standalone childcare centre outside of the retail portfolio, to further add appeal to its residential communities.
Stockland (ASX:SGP) has guided towards funds from operations (FFO) – its preferred profit metric – per security growth of 5.0% to 6.5% in FY18, with growth tilted towards the first half of the year due to the timing of residential settlements. Distribution growth is pinned at 4.0%, representing 26.5 cents per security, assuming no material change in market conditions.
On the same day in late April that Stockland provided its third quarter update, the company announced was commencing construction of a $3.7 million childcare centre at its Aura community on the Sunshine Coast. The facility will be operated by Goodstart Early Learning, Australia’s largest early learning provider. Stockland announced the modern childcare centre will “feature a 952 square metre outdoor playspace and provide a ground-breaking STEM (Science, Technology, Engineering and Mathematics) focused approach to early learning education.”
Stockland General Manager for Medium Density and Retirement Living Development, Ben Cantwell said: “This development is in line with our strategy to deliver the best communities in the country – providing excellent outcomes for residents and providing key infrastructure close to home,” and went on, “Approximately 1.3 million children are expected to attend some form of child care service over 2017-18. With Australia’s birth and population rate consistently on the rise and revenues set to increase by 34.2% to $12.1 billion by 2019-20, we see growth in the sector as a true opportunity.”
Stockland (ASX:SGP) has another six childcare centres in the pipeline to be located across its master planned communities. As with the Aura centre, Stockland will develop and own each centre, while sourcing partners to operate them. The childcare centre at Aura is slated to open in January 2019.
According to Stockland, Aura is the largest master planned community ever undertaken in Australia under single ownership. Over next three decades more than 20,000 new homes will be built across the huge 24 square kilometre site, along with “a 700 hectare Environmental Protection Zone, numerous parks and sporting facilities plus two business and enterprise parks.” Those wanting to keep fit might be attracted by the 200km-plus of cycle and walking trails planned.
The diverse nature of Stockland’s communities has been part of the formula in seeing its key residential business flourish. About 75% of buyers over the past year have been owner occupiers.
Source: Stockland (ASX:SGP)
As can be seen below there were significantly lower residential net deposits in the third quarter, reflecting fewer releases in Sydney and the timing of new projects to be launched in Melbourne and Brisbane.
Source: Stockland (ASX:SGP)
The company said it is on track for around 6,500 settlements in FY18 with operating margins expected to moderate, but still be strong at roughly 17%.
New launches over the next six months include Grandview and Waterlea in Melbourne (~1,800 lots) and Rothwell and Springview, Brisbane (~600 lots).
In 1H18 the residential business settled a record 3,210 lots, marking a 12.5% increase on 1H17. Operating profit (FFO) from the segment jumped 82.8% to $182 million as the operating profit margin expanded from 14.1% in 1H17 to 20.9%.
Regarding the residential segment, Managing Director and CEO Mark Steinert said, “Residential trading conditions remain generally positive, particularly in Melbourne and Queensland. In line with expectations, Sydney has seen a slight moderation in demand from its peak. Across the country we have strong visibility of earnings over the medium term, with over 6,367 contracts on hand as at 31 March this year.”
The continued strong performance in residential is offsetting softness in the Retirement Living segment which remained “subdued” over the third quarter. The picture is more positive for Stockland’s portfolio of Retail Town Centres, which represented approximately 50% of the total asset portfolio at the end of 2017.
Source: Stockland (ASX:SGP)
Mr Steinert said, “It’s particularly pleasing to see positive sentiment and improving sales results across our Retail Town Centres, reflecting the success of our remixing and redevelopment activity.”
Over the quarter comparable speciality sales increased 3.0% from December 2017 to $9,092 per square metre. As apparel sales continue to decline Stockland is remixing to higher quality stores and categories.
Source: Stockland
In March the company opened the major third stage of the $414 million Green Hills re-development and reported that on-average, sales for existing retailers are up almost 10% since launch.
H&M was scheduled to open at the centre in May and Hoyts in June. Not long before the third quarter update the company commenced construction of the $86 million Birtinya Town Centre on the Sunshine Coast. The $37 million Wendouree re-development at Ballarat is scheduled for completion in June.
The group is also seeking to optimise its retail town centre portfolio through selective divestments.
In 2017 Stockland said it is aiming to divest approximately $300 million of retail town centres over the next 12 to 18 months and at the time of the interim results around $70 million had been divested. In April, Stockland sold its Highlands Retail Town Centre, excluding the McDonald’s pad site, for $43 million, representing a 20% premium to the December 2017 book value. More divestments are in the works and will be used to fund incremental investment in the Logistics and Business Parks.
Mr Steinert said of that segment, “High occupancy was maintained across our growing Logistics and Business Parks portfolio, with 56,000 square metres of leasing activity over the period, and we are progressing our $760 million development pipeline. We also recently completed a new logistics facility at Warwick Farm in Sydney, which is now fully leased”.
The group is seeking to increase the weighting of this segment within the portfolio to 20.0% from 14% at the end of December 2017. It is targeting 7% plus FFO yields and 9% plus IRRs (internal rates of return).
Turning to the charts, and on the daily, prices are now trading above both the 50 day (red line) and 200 day (green line) moving averages which is a bullish development. North of this region is an upside target of $4.98, being the May 2017 high.
With reference to the monthly chart, support is indicated at the 38.2% Fibonacci retracement of $3.91 (blue set of retracements). In the grand scheme of things, the broader uptrend remains in play as evident from the series of higher lows and higher highs in formation since 2010, despite the spell of weakness in price-action (the breach of the upward sloping green dashed-line). In order for the bull-camp to regain upward traction, prices would need to trade back above the long-term uptrend line of $4.38.
Summary
Stockland (ASX:SGP) trades on a forward earnings multiple of 12.8 times, and offers a projected yield of around 6.2%, with a history of steady dividends. The stock is also backed by net tangible assets of around $4.18 per share at the end of 1H18, up 4.5%.
Stockland (ASX:SGP) is leveraged to the current residential boom, which we expect to be elongated in nature.
We recommend Stockland (ASX:SGP) as a medium risk buy for Members with no exposure.
Disclosure: Stockland (ASX:SGP) is held in the Fat Prophets Income Model Portfolio.
