While equity returns continue to disappoint and yields from fixed interest and cash remain low, property has been king. And there has been no better indicator of property's performance than the listed trusts.
Investa Property Group, which boasts a portfolio of commercial and office assets in all capital cities except Hobart and Darwin, is a case in point. Two years ago its share price was trading around $1.70. Today it is trading around $2.20 after peaking at $2.23 on January 8.
At first glance that doesn't seem an enormous capital gain. A total of 50 cents or 29 per cent over two years is not exactly going to put an investor on easy street, although owning an equity portfolio boasting a similar return over that period would be something of an achievement.
But property trusts are never going to be sprinters in the capital gain stakes. Investors buy these trusts because of their capacity to pay income. Those who bought Investa at $1.70 in February, 2001 enjoyed a yield of 8.7 per cent when the trust announced a payout of 14.8 cents for the financial year to June 30, 2002. That's certainly better than what the banks are paying.
Two years later it is costing investors $2.20 to get into Investa for a yield of 6.7 per cent on the 14.8-cent payout in 2002. (That yield rises to 7.1 per cent based on the broking firm Deutsche Bank's estimated 2003 payout of 15.6 cents.) While that's still a reasonable return, it is hard to see much capital gain left in property trusts such as Investa.
But for investors holding the stock (especially if they want income) there are good arguments not to sell. While property trusts are unlikely to sustain the rally into 2003, there also seems little likelihood of any drastic sell-off. The international scene remains tense; many global economies are struggling.
It is not an environment in which interest rates are likely to rise.
More specifically, Investa is a well-run trust.
Last year, for example, the group paid $570 million for a Telstra property portfolio and, before the year was out, on-sold the Cairns site for $3.5 million, a handy $700,000 or 25 per cent gain on the purchase price of $2.8 million. In 2003 it snapped up 589 Collins Street in Melbourne for $54 million. Leasing deals recently concluded were a five-year agreement at 485 La Trobe Street in Melbourne with PKF Australia and a deal with the Queensland mining icon MIM at 410 Ann Street in Brisbane.
In a property trust round-up last month, Deutsche values Investa at $2.23 a share, a figure that has it yielding 7.2 per cent based on an estimated 2004 payout of 16.1 cents.
Deutsche says: "We believe this is a reasonable (yield) given the group's growth opportunities. Investa has a strong balance sheet with gearing at 23 per cent, which should further enhance its growth prospects.
We maintain our hold rating." This column agrees.
IPG: $2.17, Sector: Property trusts,
Business: Property investment in Sydney, Melbourne, Canberra, Perth, Brisbane and Adelaide,
Market cap: $1814 million,
Final dividend (June 30, 2002): 14.8 cents
Yield: 6.8 per cent,
Price-earnings multiple (June 30, 2002): 14.6 times At January 24
Wildcard
Kalrez Energy (KRZ, $0.007) BUY
IT WAS the $2 million shot in the arm that the Perth-based oil and gas explorer Kalrez Energy needed. Just when the company looked beaten, the investment company Tulloch Lodge made a capital injection in the form of $1.5 million in debt and $500,000 in equity. The financing, which will help fund its Seram joint venture in Indonesia and retire debt, helped take the stock to one cent - its highest level since May last year. For much of the second half of 2002, Kalrez traded below half a cent. But murmurings of the capital injection no doubt prompted some buying and in the first eight trading days this year it gained 66 per cent. It has settled back around 0.08 of a cent. Not exactly expensive, so get on board and hopefully enjoy the ride.
Bulls
Sirtex Medical (SRX, $4.85) SPECULATIVE BUY
Paul Pekish, a senior private client adviser at Paterson Ord Minnett, says nine US hospitals have employed technology developed by Sirtex for liver cancer treatment since March. "We forecast this rising to 89 US hospitals over the next three years," he says. Paterson Ord Minett is forecasting Sirtex will report 2003 earnings of $3.8 million rising to $14.6 million in 2004.
Australian Worldwide Exploration (AWE, $1.00) BUY
John Featherby, a senior investment adviser with Hartleys, says Australian Worldwide Exploration's BassGas Project has made good progress towards starting production late next year. "The company is well managed, well funded and is still undervalued based on existing production assets and BassGas," he says. "If the offshore Perth Basin meets with further success, this will become a hot new province, which the market won't ignore."
BHP Billiton (BHP, $9.36) BUY
James Georges, a senior equities dealer at Terrain Securities, say BHP is trading in an environment of boardroom disputes. "During this period of uncertainty, investors can take advantage of a world-class operation which is undergoing short-term consolidation," he says. "On the plus side, the recent sharp increases in commodity prices has been overlooked amidst the current boardroom shuffling." Accumulate within the mid-$9 range.
Bears
Goodman Fielder (GMF, $1.74) SELL
Paul Pekish, a senior private client adviser at Paterson Ord Minnett, says Goodman Fielder considers Burns Philp's recent takeover offer price too low when compared with the value of international food companies. However, Mr Pekish says: "We do not believe that Goodman deserves to trade on the same multiples as European and US food companies, which warrant higher valuations." He says the Burns Philp $1.85 offer price is above Paterson's valuation for Goodman and investors should take the opportunity to sell.
Bank of Western Australia (BWA, $3.74) SELL
John Featherby, a senior investment adviser with Hartleys, says interstate expansion remains the key to BankWest's long-term growth and concerns still surround its overall asset quality. "There are also lingering concerns about its ability to deliver earnings certainty due to its high exposure to the resourcebased state economy," he says.
Newcrest Mining (NCM, $7.02) TAKE PROFITS
James Georges, a senior equities dealer at Terrain Securities, says the recent gold price high of $US358 an ounce has seen the share price of Newcrest rise about 33 per cent. However, "one must look back in history which shows that the gold price, and indeed other commodities such as oil, fall steeply during and post a Middle East conflict," he says. Sell on rallies.
