The residential property market is far from attractive from investors, but Deutsche has an interesting comment on Peet, a stock that has been hammered in the way that one would have expected the entire sector to have been. Since the middle of 2010 it has underperformed the All Ords by less than half. This year it has tracked the All Ords, suggesting it has hit bottom. The fundamentals are not especially attractive with an earnings multiple of 15 times and no dividend yield forecast for this financial year, although 4.9% forecast for next financial year. But it may be a counter cyclical capital gains play. According to Deutsche it is undervalued:
We continue to believe PPC has several attractive features as a longer term investment despite the continued weakness in Australian housing. The stock is trading in line with its Book Value per share (i.e. land at cost not mortgage valuations, and excludes Funds Management & JV), which suggests to us the current share price implies a negative value for FM & JV and/or significantly lower land prices. Further we believe the value embedded in the land bank is not fully reflected in our valuation, and with several large projects contributing to future growth we maintain our Buy rating.
Deutsche has a price target of $2.05, which is a hefty gain on the current price. And it is making the forecast based on a pessimistic read of the property market:
ABS housing data available to March indicate the market remains weak. March building approvals annualized at 138k vs. historical average 156k and Dec-Q housing starts annualized at 135k vs. FY09 trough 131k. Our DB house forecast is for housing starts to bottom in FY12 and grow moderately (sub-5%) in FY13. We believe it is too early to discern any impact from the 50bps rate cut.
But Deutsche fundamental method of valuing the stock does show up the short comings of the method in extraordinary times. After all, the assumption behind Peet being a buy is as follows:
We remain of the view that land is an appreciating asset the longer term, and as such we see PPC’s deferral of development capex in a weak sales environment as positive (vs. discounting heavily to clear inventory). PPC has several large projects (GDV > $500m) to contribute to growth in 2013 and beyond.
Hmmm, as the Unconventional Economist has shown, almost all of the Australian property bubble is actually in inflated land values. If it continues to unwind, big land banks are going to look very nasty on developer balance sheets. And almost half of Peet’s land is in the troubled markets of QLD and VIC. In short, risk is getting short shrift, but does at least get a mention:
We assume a recovery in 2013 (mainly 2H), and there is downside risk if 1H12 conditions persist for the remainder of the year.
Indeed!