Adding Over 3,000 Sydney Apartments Will Strengthen Future Residential Prospects

Key Takeaways

• Expansion into the residential sector and new data center developments position Stockland for future revenue growth and portfolio diversification.
  
• Strategic capital partnerships and ESG initiatives aim to enhance capital access and align with sustainable investment criteria for improved valuation.
  
• Financial risks include reliance on second-half performance, declining investment income, market challenges in Victoria, and weather-related delays affecting revenue and cash flow.

Catalysts

We are a leading creator and curator of connected communities with people at the heart of the places we create.

• The acquisition and integration of 12 Masterplanned Communities (MPC) into Stockland's platform, along with the launch of 2 additional communities, positions the company to increase supply in response to demand. This expansion is likely to enhance future revenue streams by boosting settlement volumes in the residential sector.
  
• The expansion of Stockland's Residential platform, including over 3,000 apartments in inner Sydney and a focus on build-to-sell and build-to-rent sectors, suggests potential for significant growth in residential revenues and diversification of earnings.
  
• The development and power zoning for 100 megawatts of data center capacity at their MPark site could serve as a catalyst for future revenue growth and higher margins by tapping into the high-demand data center market.
  
• The establishment of new capital partnerships, notably in the Logistics sector, with M&G Real Estate and KKR, could provide ongoing access to capital, allow for scale in high-demand sectors, and improve the return on invested capital through recurring management fee income and increased logistics assets.
  
• Active efforts in ESG and renewable energy initiatives to achieve net-zero Scope 2 emissions may position Stockland better in meeting investor criteria for sustainable investments, potentially leading to improved capital market perceptions and, hence, better valuations impacting the perceived quality of earnings and long-term revenue potential.

Stockland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stockland's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.7% today to 26.0% in 3 years time.
• Analysts expect earnings to reach A$1.1 billion (and earnings per share of A$0.45) by about May 2028, up from A$448.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$1.5 billion in earnings, and the most bearish expecting A$663 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 29.3x today. This future PE is about the same as the current PE for the AU REITs industry at 15.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

Stockland Future Earnings Per Share Growth

Risks

• A material skew towards the second half of the fiscal year is evident, which presents a risk of not meeting expectations if market conditions do not align as forecast. This affects cash flows and revenue timing.
  
• Decreased FFO compared to the previous year, driven by asset disposals, means reduced income from investments and might imply lower net margins if replacements do not generate equivalent revenue.
  
• High cancellation and default rates in Victoria, although improving, suggest ongoing challenges in that market which could impact settlement volumes and thus revenue.
  
• Weather-related construction delays in Queensland and lower sales in Victoria negatively impact the Land Lease business, creating risks for revenue targets and operational efficiency.
  
• Unprofitable cash flow in the first half, with expectations for improvement contingent on settlement receipts and construction-related expenses, indicates financial risk if cash inflows are delayed or less than expected.

Valuation

• The analysts have a consensus price target of A$5.511 for Stockland based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.5, and the most bearish reporting a price target of just A$4.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$4.1 billion, earnings will come to A$1.1 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of A$5.49, the analyst price target of A$5.51 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.