This article is from the Australian Property Journal archive
ANALYSTS Goldman Sachs JBWere has slapped a downgrade rating on Valad Property Group following the group's announcement earlier this week.
In addition, analysts JPMorgan who have “Overweight” rating said Valad’s revamp payout policy from FY09 will result in a fall in distributions.
GSJBW has downgraded Valad from Hold to Sell and has set the target price at 85 cents from $1.15.
GSJBW said its target price reflects both the lower expected income in FY09 as well as an adjustment to blended EBIT multiple.
Meanwhile, JPMorgan forecasts Valad’s distribution will fall as the group reverts to paying out cash earnings from FY09 rather than underlying earnings.
“We forecast DPS will fall 9.5% to 10.0 cents. We expect the cash conversion will lift from the expected 70% in FY08 to ~85% in FY09 due to better timing on cash generated from development profits and VCS earnings,” JPMorgan said.
Valad announced their FY08 EPS and DPS will be 11.1 cents, below 12.5 cents DPS forecasts announced in March.
Merrill Lynch said Valad’s high leverage to transactional profits is a key risk.
“The fact that Goldfields House, Digital Campus and Kennards storage assets add an incremental 3 cents to Valad’s FY08 EPS highlights the leverage of the business to these trading profits. After overhead costs are allocated to these earnings they will contribute significantly less than 49% of the second half EBIT, however without them EPS falls by this amount (due to the fixed overhead component).
“With limited demand for investment property across the UK and Australia (as illustrated by low transaction volumes), combined with cap rate expansion, higher funding costs and development margin compression, these earnings and the business’s leverage to these earnings are a key risk for the stock,” ML said.
But ML maintains a Buy rating.
Citi Investment Research rate Valad as High Risk, the firm said in the event of a major economic event, cap rate reversion would directly affect NAV valuations and the performance, and thus demand for underlying real estate funds that Valad manages.
“An increase in inflation (and hence bond yields, and interest rates) is also a risk to valuation as investors may seek alternative asset classes. Debt costs could also increase on the floating rate portion.
“VPG has limited on-balance-sheet exposure to development/projects. However, the funds from which it generates fees actively develop. In the event of a cyclical downturn impacting project feasibility, fee growth may be slower than our projections.
“A slowdown or increase in projected FUM growth or the ability to raise capital poses both downside and upside risk to the Valad business model. It may have to use more of its own capital to achieve its projected FUM growth,” Citi concluded.
Valad’s share price traded cents or 8.92% lower at 71.5 cents.
Australian Property Journal
