Burrell Bourse - November 2020 | Page 15

COMPANY NEWS & UPDATES

Mirvac Group ( MGR )

Hold Valuation $ 2.65

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Punished for Apartment & Office Skew

We increase our valuation for Mirvac to $ 2.65 , as we now ascribe a higher value to Mirvac ' s residential business .

Mirvac has momentum for FY21 earnings , with 483 residential lots settled in the September quarter , around 660 contracts exchanged , and an additional 500 lots on deposit or conditionally exchanged . We still estimate 2,260 lot settlements in FY21 , but we increase our price expectations . We estimate Mirvac ' s achieved prices in the apartment space will decline this year as popular projects such as Eastbourne roll out of the sales mix , and foreign investors evaporate . But we now assume only an 8 % price decline .

We view Mirvac securities as modestly undervalued at present , likely being punished for its apartment and office skew , where we don ' t expect the pain to last forever . We don ' t see strong evidence that COVID-19 is prompting buyers to shun apartments in favour of detached housing , and exit urban areas . If it is occurring , there is little evidence that it ' s a permanent change driven by COVID-19 . Renters certainly appear to have abandoned inner areas , driven by locals working from suburban homes , and the absence of tourists and foreign students . But owner-occupier purchases are more permanent decisions that we believe are driven by employment , and location .

We think the more important change in residential market dynamics is the switch away from investors , with owner occupier upgraders , downsizers , and first homebuyers increasingly important homebuyers . Mirvac ' s brand , good locations and high build quality should see it gain market share . We still factor in pain for Mirvac due to the absence of foreign investors , especially from China . However if this is partly permanent , it should be mitigated by an absence of foreign developers building competing projects .

Enthusiasm for suburban and regional areas may have increased but we believe well located apartments retain appeal . Evidence comes from Mirvac ' s apartment sales in states that have been relatively immune to COVID-19 . Mirvac said in its quarterly operational update that its national sales leads were up 34 % on the previous quarter and exchanges up 40 %, driven by government stimulus benefitting its master-planned communities projects , and apartment projects in Western Australia and Queensland . In the main , these apartment projects are in urban locations .

Government support measures undoubtedly increased demand , but we do factor in some pulling forward of demand that would have existed anyway . The first home loan deposit scheme allows buyers with a 5 % deposit to buy now instead of waiting to save a 20 % deposit , the first homebuyer assistance scheme merely reduces stamp duty , and the homebuilder scheme deadlines undoubtedly pulled forward planned purchases . We therefore continue to assume modest sales and price growth in outer years . However , the sales boost trims some of the overhang of dwelling stock , and with dwelling commencements still far below their peak , this we think leaves Mirvac in a good position to grow market share and maintain sales . We estimate that Mirvac no longer needs to offer significant discounts or incentives to get contracts signed .

Meanwhile we continue to expect negative headlines in the office space for at least 1-2 years . This will likely include rising vacancy and weaker rental growth . We make no change to our assumptions for Mirvac ' s office portfolio , assuming that rental income declines in FY21 , grows slowly in 2022 before returning to trend growth levels in 2023 . Mirvac has a solid lease profile with only 8 % of leases set to expire for the remainder of FY21 , and another 8 % in 2022 , and a high proportion of precommitments on its office developments .

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