ASX: BUY HOLD SELL – MGR

Mirvac Group (MGR) is engaged in real estate investment, development, third-party capital management and property asset management. MGR has three main segments, each responsible for the following

• Office & Industrial: manages the office and industrial property portfolio to produce rental income, along with developing office and industrial projects. Also manages joint ventures and properties for third-party investors and owners.
• Retail: manages the retail property portfolio, including shopping centres, and also develops shopping centres and manages joint ventures and properties for third-party investors and owners.
• Residential: designs, develops, markets and sells residential properties to external customers, including Masterplanned Communities and Apartments, in core metropolitan markets.

Mirvac reported last Thursday (8 August) and delivered full-year operating NPAT of $631m versus $608m a year ago. Revenue fell slightly over the year by 1%, to $2.78bn, while net profits fell 6%, to $1.02bn vs $1.09bn a year earlier. The results were at the top of Mirvac's guidance and the company will pay a total of 11.6c a share as distribution, representing a 5% rise to the distribution last year. Operating EPS (MGR’s net income after taxes excluding extraordinary items, divided by average common shares outstanding) came in at 17.1c, which was at the top end of guidance. Guidance was positive for FY20, with OEPS expected to be 17.6-8c, and distribution guidance of 12.2c per stapled security. Whilst the headline numbers were sound, there were a lot of moving parts – not all of them good. Residential revenue was hit hard by the soft housing market, falling one-third (34%). Office revenue for the year to June was 72% higher however, making up for the fall in residential revenue. An offset strategy, supported by the solid office income, held up dividends to shareholders. The outlook was mainly positive, if a little murky. MGR forecast it will increase earnings from 3%-4% in the coming year and deliver 5% growth in dividends. That said, the business cautioned that while residential conditions are expected to improve, there remain headwinds from weak consumer confidence and continued tight lending. How MGR achieves those goals will be interesting. The company remains steadfast in its plans to build 5000 rental units over time, to be funded by its own and third-party capital. CEO Ms Lloyd Hurwitz said Mirvac's strategy is to hold these units "forever" in contrast to some developers who are using a build-to-rent strategy as a stopgap in the face of weak pre-sales. MGR retail division's earnings were basically flat over the past 12 months but efforts to evolve centres towards more experience and service-based tenancies would continue, while the group raised nearly $800m between May and July for new and existing development projects. Some of that money will be pumped into the Hatch innovation program, which supports start-ups in new businesses such as co-working spaces, pet concierges and urban farms. Finally, more solar energy projects are planned, such as those at Ascot House in Brisbane and Marrick & Co in Sydney. THE NUMBERS - These are the numbers from our STOCK BOX. Main observations:

• ROE is solid and stable but unspectacular, hovering around 7%.
• Revenue growth and EPS growth are modest but stable.
• The stock is not particularly cheap, at almost 20x current earnings. That said, it compares favourably to GMG (30x) and DXS (22x)
• Yield is modest, at 3.7%.
• The stock is reasonably well covered, with 9 brokers offering opinion. 1 has a BUY rating, with 5 a HOLD
• The stock is trading at a 31.4% premium to intrinsic value, and a 15% premium to the average target price of brokers surveyed by Thomson Reuters.

WHAT SORT OF INVESTMENT IS MGR? Most people probably think of REITs as fairly boring, stable, income stocks. That has not been the case recently however. Falling interest rates have provided jet fuel for an A-REIT sector take-off, and MGR is one of the many companies to benefit. Still, MGR’s fortunes will be tied, in large part, to the fortunes of the residential property market. Whilst there are signs of improvement on that front, even MGR themselves have provided subdued commentary.   BROKER RECOMMENDATIONS The broker table above is slightly more negative than positive. Most brokers were happy with the recent results but note that share price has run hard over the past 12 months and that the valuation looks stretched. Macquarie is the most bullish, highlighting a shift in the mix in earnings as a positive and that a move to passive earnings (i.e. rents) warrants a higher valuation than active earnings (i.e. building). Credit Suisse was the latest to downgrade, noting that residential pre-sales are trending lower and despite the growth in recurring income. SHORT-TERM TECHNICAL VIEW What can we say about the chart above? It’s an undeniable trend which has persisted for 12 months. Momentum is strong and any modest pullbacks or sideways consolidations have been met with renewed buying pressure. SHORTING This is taken from the Shortman website. The grey line is the share price, the blue line is the percentage shorted (left-hand scale). Short interest in MGR got as high as 2.5% recently, but has since fallen away sharply to less than 1%. At those levels, it is insignificant and, given the recent solid results, isn’t likely to pick up anytime soon. CONCLUSION We quite like MGR but it is not our favourite pick in the space – that honour goes to GMG which we hold in the MT Growth Portfolio and has exposure to the burgeoning e-commerce trend. MGR’s weighting of residential, which is still facing some headwinds, is the key area of concern. That said, the shift in earnings mix and underlying positive conditions in terms of low interest rates should continue to support the share price. On that front, if we were to be buyers, we would want to do so on a pullback into the 300c region. At current prices, it is no better than a hold.