We have a Fair Value of $0.69 per unit, up 6% on our previous pricing and have an Accumulate recommendation for this stock.
Event Analysis
For the full year to 30 June 2010, the company reported a statutory NPAT of -$562.6m which was up around 53%. Operating profit of $310.0m was down 24% on FY09. Property revaluations were negative this year at A$558m. EPS (loss) on statutory profit was 4.6 cpu and operating profit of 5.25 cpu fully with DPS of 3.4 cpu, which were slightly below our expectations. We expect GMG earnings growth to be solid for FY11 and FY12. FY10 performance was underwhelming, but not unexpected, with revaluation write-downs continuing to flow through the business. The Investment and Management divisions continued to support the business though the re-activation of the Development division is expected to provide positive operating earnings going forward. GMG should be considered by income investors willing to bear medium capital risk in the short term.
Divisional Results
Overall distributable operating profit fell by 24%. Both Investment and Management divisions provided positive operating earnings and continued to carry the Development division. The commencement of A$1.2bn in projects for the Development division should see positive operating earnings going forward.
Investment
Overall property fundamentals have remained stable with occupancy down only 1% to 93%, tenant retention is considered good at 75% and weighted average lease expiry fell only 5% down to 5.5 years. Like for like rental growth was flat as market rents are still below average portfolio rents. Gross revenue fell 10.6% to A$389m and operating earnings fell around 13%. Earnings from this division made up around 90% of total operating earnings with its contribution up from around 75% previously. The value of the division?s portfolio was down A$0.9bn as a result of unrealised revaluation losses, asset disposals sales and reduction in cornerstone investments in its managed funds. The strong development pipeline is forecast to directly and indirectly benefit earnings of this division over the next two years, through its investment in managed funds.
Management
The value of assets under management declined by 4% to A$12.6bn as a result of negative unrealised property revaluations (A$0.6bn) and currency rate movements (A$1.1bn). While the value of Australian, New Zealand and Asian property assets are considered to have stabilised there is still some risk of further minor write-downs of existing assets in the UK and Europe during 1H11. A total of A$1.42bn in new equity has been raised and used to launch four new funds and re-capitalise the existing Australian Industrial fund. Gross revenue fell 74% to A$125.6m and operating earnings fell around 59%. Earnings from this division made up around 10% of total operating profit for the business with its contribution down from around 25% previously. In addition to equity raisings undertaken GAIF completed refinancing of A$1.9bn in debt facilities and the establishment of co-investment vehicles in the UK and Europe provide long-term opportunities in markets which are expected to see positive growth from FY12. The division has access to A$1.3bn in uncalled equity and A$0.8bn of undrawn debt to provide liquidity to take advantage of future opportunities.
Development
This division contributed positively to earnings in FY10 having previously been put on hold. A total of A$1.2bn in new projects commenced and the source of future development funding has been de-risked with A$1.3bn in new equity raised for Australian, UK and European projects. A focus is on pre-leased and pre-funded projects to re-risk returns. The development pipeline is now in excess of A$10.0bn. Work in progress totalling A$1.3bn utilises 500m sq m of land held by the Group and the managed funds. The strong development pipeline is expected to provide positive operating earnings in FY11.
Strong Balance Sheet
A strong balance sheet has been maintained with a net cash position of A$515.1m, interest cover of 3.8x and weighted average debt maturity of 3.3 years. The business has available liquidity of A$1.7bn and undrawn debt facilities of A$1.8bn.
The current weighted average hedge rate has increased to 5.89% up from 4.88% previously. We would expect that the average cost of debt will increase on existing facilities which expire in the short term.
Strategy
GMG maintains a conservative outlook for global market conditions with a limited number of opportunities in the short-term. The re-activation of the Development division with its existing development pipeline, the focus on pre-leased and pre-funded projects, as well as available capital and undrawn debt facilities should allow it to take advantage of any appropriate opportunities that may arise.
Announced FY11 guidance is for operating profit after tax in a range of $370m to $380m equating to EPS of 5.3 cpu to 5.5 cpu. We believe the only constraints on achieving this relate to market conditions in the UK and Europe.
We have a Fair Value of $0.69 per unit, up 6% on our previous pricing and have an Accumulate recommendation for this stock.
GMG Price at posting:
$3.08 Sentiment: LT Buy Disclosure: Held
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