Blue sky and a dry track: conditions right for Mirvac’s comeback says Morningstar

Developer Mirvac is looking less risky. Amid a double-digit share price decline, Morningstar analysts are doubling down on their conviction a brighter future is ahead.

The post-covid economic reopening and exit of home-builder rivals from the Australian development and construction industry are improving Mirvac’s position, says Morningstar analyst Alexander Prineas. Amid greater certainty over profit forecasts for this year and next, Prineas reduced his uncertainty rating from high to medium last Friday. The uncertainty rating reflects an analyst’s confidence in the accuracy of a stock’s fair value estimate.

At today’s prices investors purchasing Mirvac are effectively receiving the value of its fund management and development businesses for free, says Prineas.

“We expect Mirvac to gain market share amid tough conditions, due to its scale and land bank,” says Prineas. “The group’s commercial property portfolio should gradually recover from the ravages of covid-19.”

“You can buy the business for below the net tangible asset value and essentially, also get the development business for free. Because you're not paying anything for it at the moment.”

Shares are trading at a roughly 20% discount to the company’s net tangible assets--the total value of physical assets after liabilities. In other words, investors receive the net value of Mirvac’s property, plant, equipment, inventories and cash at a double-digit discount.

One of Australia’s largest residential developers, Mirvac Group builds and manages property across the commercial, retail, industrial and residential sectors, including Sydney’s EY Centre. The company is also building out its passive property investment wing business.

Morningstar upgraded Mirvac’s fair value last month, bumping it from $2.65 to $2.85 per share. Shares are currently trading at an 27% discount as of Tuesday close.

Mirvac’s stock price has been steadily declining since last September as investors fled the residential construction sector amid several high profile liquidations. Builders Probuild, Privium, Pivotal and Condev all failed in the past eighteen months, stoking fears of further contagion. Prineas argues Mirvac’s direct exposure is minimal.

“So if you Google Mirvac and Metricon, you get a lot of Google results of projects where Metricon is building houses, on sites that Mirvac developed, but no, they had typically has no exposure,” he says.

Mirvac is also insulated because it can handle construction inhouse, protecting it the risks of builders entering administration or liquidation, he adds.

A slowdown in the residential apartment sector after years of breakneck construction also weighs on Mirvac, say Prineas. Border closures impacted international offshore investors demand whilst domestic home buyer opted for houses over apartments.

However, harder times could play to Mirvac’s advantage and help it muscle out smaller rivals, says Prineas.

The developer’s large commercial property portfolio produces steady cash flows that offset volatile development earnings. Offices made up 61% of the passive portfolio by book value and approximately two thirds by earnings contribution. Occupancy sat at 95% with an average lease of 6.3 years.

Debt, a perennial concern for developers, is under control on Mirvac’s “strong balance sheet”, adds Prineas. Gearing sits at 22%, with an average debt maturity of six years.