By Charlie Aitken of Southern Cross Securities.
When a big cap stock rallies off its lows and it doesn’t suit underweight institutional investors, there seems to be a trend of rumours about an imminent capital raising starting. Remember, the last three stocks in Australia that were supposedly “cum issue” (that is, ready to issue new capital) it was Boral at $2.40, ANZ at $13 and Macquarie Bank at $15. None issued equity and subsequently all rallied sharply as underweights covered.
The reason Westfield shares are underperforming is the rumour that it will raise equity to buy assets from the collapsed General Growth Properties. I certainly don’t think Westfield needs new equity to fund any cherry-picking of General Growth’s assets. Remember, Westfield raised $3 billion in new equity recently and I don’t expect any further near-term dilution from the Lowy family, who control the company.
At 2.78% of the ASX200, Westfield’s recent absolute rally off its lows hasn’t suited most institutional investors, who are underweight or naked the stock. However, since the collapse of General Growth Properties, Westfield’s largest US peer, Simon Property Group has rallied from $38 to $49 (a 27% rise), while Westfield has actually fallen in recent days.
Westfield yields 8.3% at current prices and the company’s 20-year price/earnings (P/E) premium to the market has been wiped out. You are paying nothing for Westfield’s development business and the stock is basically a self-funding call option on the US and Australian consumer, finding a little more confidence as the year progresses. It is also a self-funding call option on tier-one mall asset valuations falling less than the market is currently discounting.
I continue to recommend accumulating Westfield shares on days of underperformance and putting them in the bottom drawer. Quality is rarely on sale.
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