Yovich & Co. Market Update - 27 March 2017
Mar 27, 2017 | Commentary
- In the last month we have seen the New Zealand share market resist falling below the 7,000 point level which has now been cemented as a floor for the market. This was in the face of what was a slightly negative reporting season with more downgrades to earnings than upgrades.
- Across the Ditch the market has been seesawing around the 5800 point level, with Utilities benefiting from the Energy Crisis in South Australia. The biggest gains have been in AGL Energy with the stock up 8.33% over the past 4 weeks.
- The “Trump Trade” might have come to an end with investors wanting to see that the New Administration can deliver on their pro growth policies.
- The UK market is prepared for the signing of Article 50 to begin the two year process of exiting the European Union.
- The Kiwi has fallen slightly against both the US Dollar and the Aussie as expectations become more confident that interest rates will remain steady in the local market.
NZ Listed Property Sector – Reassessment on Rising Bond Yields
The Listed Property Vehicles (LPVs) have had a dramatic fall over the past 12 months, in some cases falling by more than 15%, despite improving Net Tangible Asset values and consistent dividends. Cap rates, or required return from property have reached its lowest levels since the last property bull market in 2007. If this is the top of the cycle (I am not convinced that it is), what impact will increasing cap rates; and thus falling property values have on the various listed companies? First NZ Capital has recently produced an in-depth review of the sector and here are the main conclusions:
1) Sector pricing has reduced sharply on the back of bond yield increases. The sector is now marginally above NTA, implying that the market is pricing limited valuation upside from here:
- As a result, the sector average P/NTA ratio has reduced to now sit at around 1.02x from a high of around 1.2x in mid-2016, implicitly starting to consider the potential for cap rates to increase at some point.
2) If NTAs fall, which LPVs are best placed to absorb the fall?
- When considering committed gearing, Goodman Property Trust, Vital Healthcare Property Trust, and Property for Industry Limited have significant capacity to absorb a softening in cap rates; Argosy Property Limited and Stride Property Ltd with moderate capacity; Precinct Properties New Zealand Limited and Kiwi Property Group Limited the least.
- In reference to current NTA values, all of the LPVs will retain gearing below the rule of thumb of 40%.
3) Under stress testing and considering varying moves in cap rates, gearing remains under Bank Covenant’s which are typically between 45% and 50%.
In conclusion, the analysis gives me confidence that even in an environment where cap rates move quickly against the LPVs, their balance sheets and the quality of their assets are in a strong position to absorb a downturn in values. Here is a summary of the Recommendations for the LPVs from First NZ Capital:
Source: First NZ Capital
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