Mirvac Group

Company Overview: Mirvac Group (ASX: MGR) is Australia’s leading and innovative property group that owns and manages assets across the office, industrial, and retail sectors. The company has over 48 years of experience in the property industry and is recognized for delivering superior products and services across its businesses. The principal activities of the company include real estate investment, development, third party capital management and property asset management. The company’s goal is to enhance the value of Australia’s cities through innovative, visionary design, development, asset management and construction.

 MGR Details

Improvement in Top Line and Bottom line: Mirvac Group (ASX: MGR) is Australia’s leading and innovative property group known for delivering innovative and exceptional workplace precincts, retail destinations, high-quality homes and connected communities for its customers. The company’s investment portfolio includes assets across the office, industrial and retail sectors. Over the last five years, the company has witnessed significant improvement in its bottom-line as well as top-line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 6.56% and its net income has increased at a CAGR of 13.69%. For FY19, the company reported a statutory profit of ~$1.02 billion and operating EPS of 17.1 cents per share. The company’s performance was anchored by the significant gains of its Office & Industrial business and its high-quality investment portfolio. The Office & Industrial business reported an EBIT of $518 million in FY19, up 26% on the previous year. The Retail business reported an EBIT of $168 million and the Residential business EBIT stood at $201 million. Over the year, the company successfully created a portfolio of thriving retail centres that offer the right retail in the right urban locations.

The Adjusted funds from operations (AFFO) grew by 8% to $570 million in FY19, reflecting continued operating earnings growth together with lower maintenance capex, and tenant incentives across the company’s investment portfolio. During the year, Mirvac Group achieved an operating cash flow of $518 million and paid distributions of 11.6 cents per stapled security, up 5% on last year.

The company’s business was impacted by COVID-19, due to which it withdrew its FY20 guidance. Despite the near-term negative economic impact caused by the pandemic, the company’s purpose and its unique urban asset creation capability positions it well to capture opportunities and generate value, throughout the recovery process and beyond. The company continues to work on its development pipeline, exploring a range of additional opportunities and improving its capabilities, to expedite the recovery process.

5-Year Financial Summary (Source: Company Reports; Refinitiv, Thomson Reuters)

H1FY20 Result Highlights: For the first half of FY20, the company reported EBIT of $460 million, up 18% on the prior corresponding period (pcp). The company reported an operating profit of $352 million, up 21% on pcp. Over the period, the company witnessed a decent rise in Property NOI (net operating income), driven by Office LFL NOI growth of 5.6%, offset by lower development earnings compared to prior period.

During the half-year period, the company extended its pipeline of active and future office and industrial developments to an expected $8.5 billion. In the Residential division, the company achieved over 800 sales in 1H20, with strong results at new releases in Victoria at Smiths Lane, The Fabric at Altona North and the Folia apartments in Tullamore.  

The company witnessed a growth of 37% in AFFO which stood at $346 million in H1FY20, compared to $252 million in H1FY19, reflecting continued operating earnings growth together with lower tenant incentives across its investment portfolio. For the half-year period, the company announced a distribution of 6.1 cents per stapled security.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 30.43% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold maximum interest in the company at 10.56% and 4.21%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s gross margin and net margin stood at 39.2% and 48.9%, respectively. The company has an asset turnover ratio of 0.08x, higher than the industry median of 0.03x. The company has a current ratio of 1.02x, higher than the industry median of 0.52x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of Paying Distributions to Shareholders: For FY19, the company paid total distributions of 11.6 cents per stapled security, up 5% on the previous year. For H1FY20, the company paid a distribution of 6.1 cents per stapled security, up 15% on pcp. Earlier, the company was expecting its FY20 distribution to be 5% higher than FY19. However, due to COVID-19 impacts, the company has reduced its distribution. The annual dividend yield of the company is about 4.57% on a five-year average basis (FY15-19). Currently, the company’s annual dividend yield, as per ASX, stood at 4.19% which can be considered at respectable levels and this might attract the attention of market players. Recently on 24^th June 2020, the company announced that for the second half of FY20, it is expecting to pay a distribution of 3 cents per stapled security, taking the total FY20 distribution to 9.1 cents per stapled security. The distribution is expected to be paid on 14 September 2020 with an ex-date of 29 June 2020.

Distribution History (Source: Company Reports)

March Quarter Update: During the March quarter, the company implemented a series of measures to protect its employees and other stakeholders, as well as the long-term viability of the business. Construction activities continued at all the company sites during the quarter, with social distancing and additional hygiene measures firmly in place. Due to COVID-19 restrictions, the company’s retail portfolio witnessed a sharp change in sales performance.

During the quarter, the company entered into an agreement to acquire a landmark site currently occupied by Nine Entertainment Co. in Willoughby from LEPC9 Pty Ltd. This acquisition reinforces the company’s ability to identify and secure opportunities on capital efficient terms, and it extends the company’s residential pipeline, enabling it to service the growing demand for new homes, as the housing market continues to recover.

Investment Property Preliminary Valuations: On 24 June 2020, the company informed that Preliminary valuations (excluding IPUC) for 30 June 2020 across 63 assets indicate a reduction in value of $306 million, as compared to the book value as at 31 December 2019. It is to be noted that these valuations are indicative only and are subject to finalisation and audit.

Preliminary Valuations for 2HFY20 (Source: Company Reports)

Key Risks: As a property group involved in real estate investment, MGR is exposed to number of risks throughout the business cycle that have the potential to affect the achievement of its targeted financial outcomes. The company is also impacted by changing domestic and international economic and macro-prudential and regulatory measures, which impact access to capital, investor activity, and foreign investment. The company’s recent performance indicates that it exposed to the risks and uncertainty associated with COVID-19.

What to Expect: Before the outbreak of COVID-19, the company was expecting its FY20 EPS to be between 17.6 -17.8 cents, representing a growth of 3 - 4% on FY19. However, due to the impacts of the pandemic, the company withdrew its earnings guidance.

Despite the impacts of COVID-19, the company’s purpose and unique urban asset creation capability have positioned it well to capture opportunities and generate value, throughout the recovery process and beyond. In its Office & Industrial division, the company is focussed on maintaining construction momentum across its portfolio, and fast tracking its $5.4 billion future development pipeline. The company expects the accelerated growth of e-commerce to support strength in demand for high-quality logistics and last mile facilities in key urban markets. With its $1.2 billion of the industrial development pipeline, MGR seems well-positioned to take advantage in the long run.

The company’s balance sheet and debt position continue to remain robust, with cash and undrawn debt facilities of $1.3 billion as at 19 June 2020. It is worth noting that only $200 million of debt is due for repayment till early 2022. The company continues to hold A3/A- credit ratings with stable outlooks from Moody’s and Fitch. The company is expected to release its FY20 results on 20 August 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MGR has corrected by ~33.44% in the last 6 months and is inclined towards its 52 weeks low price of $1.650, offering a decent opportunity for accumulation. Although the company has been recently impacted by the COVID-19 pandemic, it continues to work on its development pipeline, exploring a range of additional opportunities and improving its capabilities, to expedite the recovery process. We have valued the stock using the EV/EBITDA multiple based illustrative valuation method and have arrived at a target price of low double-digit upside (in % terms). Considering the company’s recovery plans, decent track record of paying distributions, performance in H1FY20, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.130, down by 1.843% on 16 July 2020.

MGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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