Stockland hit by housing slump

STOCKLAND has become the latest victim of the weakening housing market after it was forced to issue a 3.5 per cent, or $32 million, earnings downgrade for the year to June 30.

By InvestSMART · 28 Mar 2012

By InvestSMART ·
28 Mar 2012

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STOCKLAND has become the latest victim of the weakening housing market after it was forced to issue a 3.5 per cent, or $32 million, earnings downgrade for the year to June 30.

Investors were swift to react with the shares sold down 4 per cent amid concerns that residential market conditions may get worse before they improve.

Stocklands full-year earnings per security forecast has fallen from 31.6? to 30.5?.

Bank of America Merrill Lynchs analysts said while Stocklands downgrade was small, the sentiment impact is large given market commentary surrounding residential.

Stocklands chief executive, Matthew Quinn, blamed the action on lower residential settlements stemming from slower sales and weather delays.

The brokers said a more telling aspect was that the move represented a 13 per cent downgrade to the residential portfolio earnings, which is a main plank in Stocklands three R strategy of retail, residential and retirement.

Morningstars head of property research, Tony Sherlock, said that while he believed there was scope for further softness, the bigger question is how long will this last, particularly given the RBAs reluctance to cut rates with inflation and unemployment both apparently in check.

While the remaining parts of Stockland appear sound, we are not forecasting a material recovery in the residential division for at least 18 months, he said.

Mr Quinn said he made the decision to inform investors of the small downgrade as it related specifically to one business unit and as a percentage of that unit it was considered material.

He said that continuous disclosure requirements were more onerous because of Stocklands active share buyback scheme.

When we provided [earnings] guidance in February we noted that it was dependent on residential conditions at the time continuing. Unfortunately the residential market has deteriorated since banks lifted interest rates independent of the RBA and March sales have been lower than expected. The revised guidance assumes sales will continue to be slow for the balance of the financial year. Severe wet weather in the Illawarra has delayed production and also pushed settlements into the 2013 financial year.

Analysts issued warnings that they will be reviewing their forecasts, saying the downgrade in housing comes amid the weakness in retail.

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Frequently Asked Questions about this Article…

What caused Stockland's earnings downgrade and how big was it?

Stockland issued a 3.5% earnings downgrade (about $32 million) for the year to June 30. Management blamed lower residential settlements driven by slower sales and weather delays, with banks having lifted lending rates independent of the RBA contributing to weaker conditions.

How did the market react to Stockland's downgrade?

Investors sold down Stockland shares by about 4% after the downgrade, reflecting concern that residential market conditions may weaken further before improving.

How much did Stockland's full-year EPS forecast change?

Stockland's full-year earnings per security forecast fell from 31.6 to 30.5 (as reported in the company update).

Which part of Stockland's business was hit the hardest?

The residential portfolio was the most affected — brokers said the downgrade equated to roughly a 13% hit to residential portfolio earnings. Residential is a core part of Stockland's 'three R' strategy alongside retail and retirement.

What is Stockland's three R strategy and is it still intact?

Stockland's strategy focuses on retail, residential and retirement assets. According to the article, the remaining parts of the business (retail and retirement) appear sound, but the residential division has weakened and is weighing on overall earnings.

What is the outlook for Stockland's residential division?

Morningstar's head of property research, Tony Sherlock, said there is scope for further softness and he does not expect a material recovery in the residential division for at least 18 months. He also highlighted uncertainty around how long the weakness will last given the RBA's reluctance to cut rates.

Why did Stockland decide to disclose the downgrade publicly?

CEO Matthew Quinn said the downgrade related specifically to one business unit and was material as a percentage of that unit, so the company informed investors. He also noted continuous disclosure requirements are more onerous because Stockland is running an active share buyback scheme.

What should everyday investors watch after Stockland's downgrade?

Investors should monitor residential settlement volumes and sales trends, company announcements on production or weather-related delays, changes in bank lending rates and RBA guidance, and analyst updates — brokers indicated they will be reviewing their forecasts in light of the downgrade.