GPT Group: Interim result 2013
Recommendation
GPT Group’s share price has almost increased four-fold since reaching a low of $0.96 In March 2009. High occupancy levels and reliable rent increases from the company’s first class Australian property portfolio have produced steady distributions since the company raised billions in new capital, reduced its gearing levels and exited overseas markets after the GFC.
On the surface GPT’s 2013 interim result (it has a calendar year end) looked bland. Underlying earnings increased 4.1% from a year earlier to $237m, with underlying earnings per share increasing 6% to 12.7 cents partly due to the buyback of 25m shares at an average price of $3.73 per share. A quarterly distribution of 5.0 cents was declared (ex date 15 Aug), bringing the interim distribution to 10.1 cents and putting the stock on a 5.4% yield.
While the company is aiming for 5% earnings per share growth, the miserly 0.9% growth in like-for-like income suggests this could be a tall order longer term. The company’s cost cutting program is almost complete, and rents in the retail and office sectors are under pressure.
Key Points
- Office and retail rents under pressure
- Management expects 5% EPS growth
- Downgrading to Sell
GPT boasts the country’s best office portfolio, but icons such as Australia Square and the MLC Centre are ageing as a new supply of modern buildings take shape and a slowing economy has caused vacancies in Australian CBDs to rise to a 10-year high of 10.1%. The MLC centre is undergoing a much-needed renovation as high profile legal tenants such as Freehills relocate to modern new digs at ANZ Bank Centre. A deflating mining boom will place even more pressure on rental growth, which is needed to justify investing in a property trust that's offering a paltry unfranked yield of 5.4% and trades at a measly 1% discount to net tangible asset value.
Half Year to June 30 | 2013 | 2012 | /- |
---|---|---|---|
Total Revenue ($m) | 314 | 327 | (4) |
Underlying Inc. ($m) | 237 | 227 | 4 |
Net Profit ($m) | 257 | 276 | (7) |
EPS (c) | 13.8 | 14.7 | (6) |
DPS (c) | 10.1 | 9.5 | 6 |
Distribution Yield (%) | 5.4 | n/a | n/a |
Gearing (%) | 20 | 22 | (2) |
NTA ($ per security) | 3.76 | 3.73 | 1 |
Franking (%) | 0 | 0 | 0 |
GPT’s shopping centres aren’t immune, either. Despite sensibly investing $300m to expand the huge Highpoint centre in suburban Melbourne, the company has sold some lower quality assets as new leases are on average being struck at 6% lower rents than expiring leases. Discretionary retailers are also struggling to increase revenue despite record low interest rates and high employment.
If the company achieves 5% earnings per share growth for a few more years, interest rates keep falling and the economy holds up, then you’ll do much better owning GPT Group than staying in cash or term deposits. But we’re not sanguine about the prospects for a ‘soft landing’ in China and without a margin of safety to protect against lower rents and higher vacancy rates, the model Income Portfolio is filled with better places for your money. We’ve reduced the prices in the recommendation guide, so with the share price increasing slightly since 21 Dec 12 (Hold – $3.59) we recommend you SELL.