ASX Code: SGP
Security price: $3.85
Industry: Property
Forecast distribution: 24.5 cents per security
The recent market sell-off has thrown up a number of opportunities for income-focussed investors.
One has been Stockland, the country’s largest diversified property group, and one of our largest home builders.
The company has benefited from the strong housing market and improvements in retail conditions, but its shares have been sold off sharply in recent months.
We think that’s providing a chance for investors who can lock in a yield of more than 6 per cent in a well-managed company with exposure to a diverse portfolio of property assets.
Whether you shop, live or work, Stockland has a presence in those areas. It develops homes, owns office buildings and shopping centres and even retirement homes.
Stockland’s units started this year with a spurt, hitting a high of $4.82. But the stock has been sold down again, falling below $4.
Despite that, Stockland has been performing well with help from favourable operating conditions.
The housing market has been strong, particularly on the Eastern Seaboard; retail conditions at its shopping centres have improved.
That was reflected in Stockland’s recent full-year profit result when it posted a 7.8 per cent rise in underlying earnings per security (which excludes one-off items), helped by solid results from all its businesses.
Its residential business was particularly strong, with a 73 per cent surge in underlying profits, driven by the buoyant property market, particularly in Sydney.
Stockland has started the new finance year well, with good performance in residential, retirement living and retail sales, and it’s targeting strong underlying EPS growth in 2016 of 6 to 7.5 per cent.
The company does expect housing growth to moderate somewhat, which is ostensibly being foreshadowed by sharp declines in consumer sentiment.
Still, SGP’s development pipeline remains robust with existing and new projects like Schofields in Sydney, and the Isles of Newport and Pallara in Brisbane, where the company sees potential given its affordability relative to Sydney and Melbourne.
The company has a strong balance sheet with gearing of 23.4 per cent, and it paid total unfranked distributions in 2015 of 24 cents per security. The company has updated its distribution policy, and will now pay the higher of 100 per cent of Trust taxable income or 80 to 90 per cent of underlying profit.
Notwithstanding material changes to market conditions, the distribution will rise slightly in 2016 to 24.5 cents per security, unfranked. That gives investors a strong 6.4 per cent yield.
At $3.85 (at time of writing), Stockland is trading below our forecast valuation of $4.11, which means current prices provide both an attractive yield and the opportunity for capital growth.