Since the company sold its hotel management business in December 2011, the company comprises of two core divisions, Investments (MPT/MRES), which is a trust structure and includes office and retail portfolios. The division also includes its Investment Management arm. Development, which develops a variety of property types including, residential, apartments, master planned communities and commercial.
MGR has been undertaking a restructure of its business with a focus on de-risking its earnings stream.
Last week MGR reported its results for the six months to December 2012, which we think showed some promise of things to come. Statutory profit was $55.2 million for 1H13, impacted by $273 million of inventory impairments.
Revenue was $619.4 million, a 7.1% decline on the same period a year earlier. On an operating profit basis – after tax but before specific non-cash items and significant items – the company made $194.2 million, a 3.6% decline on the previous corresponding period.
Although a decline in profit, it is important to note that the company did increase its operating margin by 120 basis points. The increase in margin was on the back of a higher price received for it development projects.
Tangible Book and Yield
On the back of revaluations in the half, MGR’s NTA increased to $1.64 per share. At the group’s current price it is actually trading at a 1.2% discount to this level as opposed to the property sector which is currently trading at a 16% premium to NTA.
At the release of its first half results the group declared a healthy distribution of 4.2 cents per stapled security and confirmed its full year distribution of between 8.5-8.7 cents per security (cpss).
This equates to a yield of 5.3%, which is slightly higher than the property sector’s average 5.2% and higher than its comparable peers Lend Lease and Goodman Group which are both expected to be around 4.3%.
Despite a slight decrease in MGR’s 1H earnings the company is looking in much better shape, especially on a balance sheet level. The group’s gearing dropped from 27.4% in 1H12 to 23.8% in the 1H13 and impressively dropped its average borrowing cost from 7.6% to 6.4%.
We believe this will see ratings agencies upgrade the group’s BBB credit rating, with the flow on effect being a further reduction in borrowing costs. In the 1H13 results MGR reaffirmed is guidance of an operating EPS of 10.7-10.8cpss and DPS of between 8.5-8.7 cpss, which would be a solid result.
We think that tight costs controls as shown by increased operating margins, a solid distribution yield and the chance of the ratings upgrade will see the current divergence in price to NTA between MGR and the rest of the property sector decline over the next few months.
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