##{"id":58760,"date":"2011-08-30T11:53:37","date_gmt":"2011-08-30T01:53:37","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/08\/30\/peets-good-value-brokers-say\/"},"modified":"2011-08-30T11:53:37","modified_gmt":"2011-08-30T01:53:37","slug":"peets-good-value-brokers-say","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/08\/30\/peets-good-value-brokers-say\/","title":{"rendered":"Peet’s Good Value, Brokers Say"},"content":{"rendered":"

\n\t– Peet's<\/span> earnings met expectations
\n\t– Forecasts cut given ongoing tough operating conditions
\n\t– Stock still offers value according to brokers
\n\t– Buy ratings retained<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tFull year earnings for property development group Peet<\/span> Limited ((PPC)) rose 4% to $44 million, a result broadly in line with market forecasts and one that followed on from strong earnings growth in FY10<\/span>. Reported earnings of $22.1 million were impacted by a non-cash write-down to the carrying value of some longer-dated inventory in Queensland.<\/p>\n

\n\tRBS<\/span> Australia viewed the result as solid given increasingly challenging market conditions, with these conditions expected to continue for at least the next six months. Market conditions meant settlements in the period fell by 7%, but Macquarie notes this was offset by a 13% rise in average selling prices.<\/p>\n

\n\tEarnings from development funds rose by 21% in EBITDA (earnings before interest, tax, depreciation and amortisation<\/span>) terms in FY11<\/span> and BA Merrill Lynch notes this offers further evidence Peet<\/span> is generating growth away from the traditional retail investor base.<\/p>\n

\n\tPost the full year result brokers have cut earnings forecasts in coming years, BA-ML attributing this primarily to reduced margins on some recent start-up projects. As well, RBS<\/span> has lowered its numbers simply to take a more conservative view of the performance of all of Peet's<\/span> divisions given still tough operating conditions.<\/p>\n

\n\tThe magnitude of cuts to estimates is solid, RBS<\/span> lowering its earnings per share (EPS) forecasts by 12-15% through FY13<\/span> and Macquarie by around 11% for each year. Cuts to BA-ML's estimates have been smaller at 2-8%, but the broker had already been below market with its forecasts.<\/p>\n

\n\tConsensus EPS estimates for Peet<\/span> according to the FNArena<\/span> database now stand at 13.2c<\/span> for FY12<\/span> and 14.3c<\/span> for FY13<\/span>, which implies a relatively flat earnings outlook given EPS in FY11<\/span> came in at around 14.5c<\/span>.<\/p>\n

\n\tEarnings growth in FY12<\/span> is likely to be heavily weighted to the second half of the year, RBS<\/span> viewing this as due to the timing of new projects and positive bank revaluations<\/span> to other parts of the Peet<\/span> portfolio. Deutsche Bank suggests earnings risk for FY12<\/span> remains to the downside given current conditions.<\/p>\n

\n\tWhile land supply remains an issue, Peet<\/span> has managed to lift its land back to 50,684 lots in the last six months, up from 37,100 lots as at the end of December 2010. Macquarie values the land bank at completion at $9.1 billion, up from $6.9 billion last December.<\/p>\n

\n\tThis supports BA-ML's estimate of net tangible assets for Peet<\/span> of $1.75 per share. The land bank implies 23 years of supply at the current sales rate on BA-ML's numbers.<\/p>\n

\n\tGiven the current share price of Peet<\/span> is well below estimates of valuation, brokers remain positive on the stock. The FNArena<\/span> database shows Peet<\/span> scores a perfect six-for-six Buy ratings, with no changes in recommendations post the earnings result.<\/p>\n

\n\tThe Buy ratings are all valuation calls, RBS<\/span> noting at current levels Peet<\/span> is trading on an earnings multiple of less than 10 times for FY11<\/span>. This falls to just under nine times in FY12<\/span> on Citi's<\/span> numbers, a level the broker estimates is at a 34% discount to the Small Ords<\/span> index. <\/p>\n

\n\tA solid balance sheet adds extra valuation support, Macquarie noting net debt is currently 33.5% of total assets, but should fall in FY12<\/span> given an increased focus on syndicated projects and some non-core asset sales.<\/p>\n

\n\tThe size of Peet's<\/span> land bank also warrants a higher multiple suggests BA-ML, as does the funds business given the growth being demonstrated. As well, BA-ML points out four-year EPS growth for Peet<\/span> overall should be around 4% annually, this despite an adverse operating environment.<\/p>\n

\n\tAchieving a good return for investors may take some time however, as BA-ML suggests the current valuation gap is unlikely to close until consumer sentiment improves, interest rates are cut and or further government responses are announced.<\/p>\n

\n\tWith a more conservative approach to earnings forecasts being factored in across the market, price targets for Peet<\/span> have fallen. The consensus target according to the database now stands at $1.85, down from $2.11 previously. Targets range from $1.53 to $2.25.<\/p>\n

\n\tShares in Peet<\/span> today are slightly weaker and as at 11.20am<\/span> the stock was down 2c<\/span> at $1.21. This compares to a 12-month trading range of $1.10 to $2.04. The current share price implies upside to the consensus price target according to the FNArena<\/span> database of around 53%.<\/p>\n

\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"