Dubai The Differentiator For Sunland Group

This story features SUNLAND GROUP LIMITED. For more info SHARE ANALYSIS: SDG

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By Chris Shaw

Rising interest rates are a challenging environment for property developers so those with a differentiating feature are in a more advantageous position, a fact not lost on Austock Securities as it has initiated coverage on Sunland Group ((SDG)) with a Hold, High Risk recommendation.

As the broker points out in its initiation the company remains primarily a residential developer, with its development pipeline of $6.4 billion skewed to the Dubai/United Arab Emirates (UAE) market. As well it notes the group is lowly geared, something it expects will prove beneficial given the current volatile environment as it will allow the company to take advantage of any opportunities that present themselves.

The stock currently trades at a discount to its peers and while some of this reflects guilt by association given the company is Queensland based it is justified in the broker’s view as earnings are largely transactional and therefore more volatile. Austock also points out the company has less well established recurrent income streams than others in the sector and this too is being reflected in the share price discount.

On the plus side the Dubai exposure in particular sees the group with a stronger earnings growth outlook than its peers, the broker forecasting a capitalised annual growth rate in earnings per share (EPS) of 22% through to FY10. Return on invested capital should also rise during this period, the broker forecasting an increase from 21% currently to around 27% in FY10.

Earnings risk in the shorter-term appears to be to the upside as the broker notes 63% of full year guidance was delivered in the first half, while it is also positive on management’s ability to play the property cycle well by repositioning the portfolio over the last year via a reduction in its Gold Coast inventory and increased exposure in Dubai and the UAE.

A further advantage of this shift is margins on projects in Dubai can be 50-100% higher than those achieved on domestic developments, while the broker expects the capital intensity of projects there to be lower given joint ventures will be utilised and the company will have the ability to make staged payments. These positives should begin to attract increased attention as on the broker’s numbers more than 50% of group earnings should come from the Dubai/UAE region from FY09.

Sunland recently reported a 1H profit of $59.8 million and the broker’s forecast for the full year is $96.0 million, which in EPS terms translates into 29.8c. Austock forecasts this will increase to 37.5c in FY09 and 52.6c in FY10, the broker’s numbers comparing with mean consensus forecasts of 29.6c, 36c and 52.4c respectively.

On its numbers the broker’s DCF valuation on the stock is $3.41, though to reflect the discount at which the stock trades it has set its price target at $2.80. This compares to the average price target according to the FNArena database of $4.80, the database showing ABN Amro, Citi and UBS all rating the stock as a Buy following its half-year result last month.

Over the past year the shares have traded in a range of $2.23-$4.60 and in early trading this morning are unchanged at $2.40 despite a slightly weaker overall market.

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