Value In Peet As It Scales Up Operations

This story features PEET LIMITED. For more info SHARE ANALYSIS: PPC

The company is included in ALL-ORDS

By Chris Shaw

Real estate development group Peet Limited ((PPC)) is the third biggest land holder in Australia as measured by number of lots, the company's current land bank standing at 33,192 lots. This implies an on-completion value of around $6.7 billion according to Citi, it also represents 14 years of production at current levels.

Citi has initiated coverage on Peet with a Buy, High Risk rating, in part to reflect the attraction of the group's land bank given about 86% is in the favourable geographic markets of Western Australia and Victoria. Deutsche Bank also covers Peet and is similarly positive on the potential for valuation upside given the exposure to these markets.

According to Citi, Western Australia offers upside from the current resource-driven recovery in the state's economy, while Victoria is attractive to immigrants given it is cheaper than the New South Wales market.

Peet's business model has three arms – company-owned projects using its own balance sheet, funds management/syndication projects that use external funds to expand the land bank and joint ventures where Peet generally funds any associated development costs.

This dual funding model is another attraction for Citi, as it means Peet is combining a proprietary investor database of more than 6,000 private investors and its corporate balance sheet. In Citi's view, the ability of Peet to couple this retail database with financial planner distribution networks could generate a step change in syndication ability.

Such a coupling could facilitate larger broadacre land acquisitions in Citi's view, something the stockbroker suggests would subsequently drive earnings growth. To achieve such leverage in Peet's funds management model requires a widening of the distribution network.

This would require the use of external distribution channels, a move Peet's management is considering as it looks to grow the business. As an example of how the process would work, Citi suggests Peet could raise $75m for a new syndicate investment using external channels, charging a 5% capital raising fee.

The syndicate would acquire land worth around $90 million, representing 1,000 lots. If Peet paid away half of its placement fee to distributors, which would mean around $1.9 million, the company could still generate around $13.5 million in sales fees.

This compares to the current model, where for example Peet conducted a $25 million raising to buy a 333 lot land parcel. In the current model Peet would keep the entire placement fee of $1.25 million but generate only around $4.5 million in sales fees.

For Citi, the returns generated by paying away part of the placement fee to expand the syndicate size are more than justified by the higher sales fees achieved from the larger project size. As projects generally include establishment, ongoing and performance fees, larger projects make sense in terms of boosting earnings growth in the broker's view.

Citi is forecasting earnings per share (EPS) for Peet of 14.2c this year, 15.5c in FY11 and 17.1c in FY12, while its bull case model suggests a valuation of $3.14. This compares to discounted cash flow and net asset valuations of $1.98 and $2.21 respectively. Citi has set its price target at $2.50.

Based on Citi's forecasts Peet is trading on a FY11 earnings multiple of around 13.1 times, which is an 11% discount to its long-term average multiple. This implies value at current levels.

In comparison to Citi, consensus EPS forecasts for Peet according to the FNArena database stand at 14.1c this year and 15.8c in FY11. The average price target according to the database is $2.51, Peet receiving Buy ratings from all four brokers covering the stock.

Shares in Peet today are unchanged at $2.08, with the stock over the past year trading in a range of $1.40 to $2.42. The current share price implies 20% upside to the average price target.

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