No Relief In Sight For Mirvac

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By Chris Shaw

As the earnings confession season hots up and companies such as Boom Logistics ((BOL)) and Ten Network ((TEN)) among others are reducing guidance for FY08 and beyond property developer Mirvac Group ((MGR)) has joined the list, last week advising the market to expect lower earnings per share and reducing the value of its residential and non-residential developments and other assets.

Previously the company had indicated earnings per share for FY08 would be 34.3c but this has now been adjusted to a range of 31.4-34.3c, the spread being to allow for timing issues with a delayed project settlement. According to Macquarie this is evidence of just how much the market has deteriorated in recent months, meaning the group is likely to find it much tougher to generate new residential sales and get settlement on time going forward.

As well the broker doesn’t expect much in the way of a recovery in developmental earnings in FY09, as margin pressure that has developed in recent months is likely to continue and possibly intensify and this will hold back earnings in the division.

To reflect this the broker has cut its earnings estimates for the current year by 6.4% to 32.3c and in FY09 by 25% to 23.5c, an action matched by most other brokers in the market. As an example UBS has lowered its forecasts in FY08 to 31.4c from 34.2c while leaving its forecast for FY09 unchanged at 29.6c, while Citi has lowered its FY08 numbers by almost 10% following the update.

The FNArena database now shows consensus earnings forecasts of 30.6c this year and 25.5c in FY09, highlighting the fact the rest of the market agrees with Macquarie’s assessment the company will face further tough times in the coming 12 months.

As well Merrill Lynch sees scope for the company to need to make additional write-downs in the coming year, while it continues to be a critic of the company’s policy of including stable asset sales in its core earnings.

The question now is what to do with the stock and here opinion is divided, the FNArena database showing three Buys, two Holds and four Sell ratings. According to both UBS and JP Morgan the write-downs were largely as expected and so are now largely priced into the stock, meaning it is somewhat oversold on a long-term view.

As a result both maintain their Buy/Outperform ratings, with price targets of just under $4.00 each. At the other end is Citi, which has slashed its target to $2.95 from $3.40 given higher gearing post the write-downs and potential for further downside risk from the group’s residential operations.

Macquarie’s Underperform also reflects concern over the FY09 outlook as well as a view the dividend yield of more than 7% at present may come under threat given the pressure on earnings. In Merrill Lynch’s view the downgrade to guidance reflects some systematic issues given the weak residential and commercial markets and so there is downward earnings risk through to FY10 at least, while it too questions the level of distributions given the company is this year paying out more than it will earn.

The lower earnings estimates have been reflected by a fall in the average price target on the stock, which the database shows is now $3.41, compared to $4.08 prior to the update. Shares in Mirvac today are slightly weaker and as at 11.20am were down 5c at 3.19, which compares to a trading range over the past 12 months of $2.90 to $6.30.

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