Federation gets the tick
During the week, group chief executive Steven Sewell said the distribution of 7.5¢ for the half-year was a substantial increase on the distribution of 6.6¢ for the half-year to December 2012, with the board also making the decision to move the payout ratio to the upper end of the 80 per cent and 90 per cent target range.
The previous guidance was for 2013 financial-year earnings per security (EPS) of of 15.5¢ to 15.75¢.
Brokers said that to declare a 2013 DPS of 14.1¢ suggested EPS at the top end of guidance and a payout ratio of about 90 per cent.
The action was taken as Federation gets closer to finalising asset sales that could see it raise as much as $1.2 billion.
According to brokers at JP Morgan, Federation's balance sheet is in good shape and can handle the 90 per cent payout.
"Federation has a $700 million pipeline of assets it intends acquiring from its syndicates on average capitalisation rates of about 8.5 per cent. It will likely to be funded with a sell down of 50 per cent stakes in further assets to capital partners at about 7.25 per cent," the brokers said.
"We expect the sales to the joint venture and and syndicate acquisitions will lift gearing to 25.6 per cent. Federation can then debt fund its share [$590 million] of the development pipeline."
Moelis & Co analyst Simon Scott also issued an upgrade of the stock, believing consensus earnings estimates for the 2014 financial year and beyond were too low.
"Based on our 12-month target price we estimate a double-digit investment return over the next year," Mr Scott said.
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Federation Centres said it increased its half-year distribution to shareholders to 7.5 cents for the half-year to June 30, up from 6.6 cents for the half-year to December 2012, and the board moved the payout ratio toward the upper end of its 80–90% target range.
Prior guidance for 2013 earnings per security (EPS) was 15.5 to 15.75 cents. Brokers noted that declaring a 2013 dividend per security (DPS) of about 14.1 cents would imply EPS at the top end of that guidance and a payout ratio near 90%.
Brokers at JP Morgan said Federation's balance sheet is in good shape and can handle a 90% payout. The company is also close to finalising asset sales that could raise as much as $1.2 billion, which supports the higher distribution level.
The article reports Federation has a $700 million pipeline of assets it intends to acquire from syndicates at average capitalisation rates of about 8.5%. It will likely fund those by selling down 50% stakes to capital partners at around 7.25%, and asset sales and joint-venture moves could raise up to $1.2 billion.
Brokers expect the sales to joint ventures and syndicate acquisitions will lift gearing to about 25.6%. Federation can then debt-fund its share (around $590 million) of the development pipeline, according to the article.
Moelis & Co analyst Simon Scott upgraded the stock, saying consensus earnings estimates for the 2014 financial year and beyond looked too low. Based on Moelis's 12-month target price, he estimated a double-digit investment return over the next year.
Investors should watch for confirmation of any full-year DPS (brokers referenced a 14.1 cents figure), updates to EPS results versus guidance, progress and completion of the announced asset sales, changes in gearing levels, and commentary from brokers such as JP Morgan and Moelis & Co.
The distribution increase and broker commentary signal a positive near-term outlook: higher payouts, a strong balance sheet per JP Morgan, and asset sales that could raise significant funds. However, the article indicates investors should still follow earnings updates, completion of asset sales, and gearing levels to judge longer-term financial stability.
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